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An Indian life insurance policyholder receives a maturity payout and must reconcile the tax outcome across four independent statute streams that intersect on the same payout. Section 194DA of the Income-tax Act 1961 requires the insurer to deduct 5 percent TDS on the income comprised in the sum paid where the aggregate payment during the FY exceeds ₹1 lakh, unless the sum is not includible in total income under Section 10(10D). The 10(10D) exemption test itself has era-dependent premium-to-sum-assured caps — 10 percent for policies issued on or after 1 April 2012, 20 percent for policies issued between 1 April 2003 and 31 March 2012, 15 percent for disability and severe-illness policies issued on or after 1 April 2013 — and any breach in any year of the policy term is fatal to the exemption. The Finance Act 2021 inserted the fourth and fifth provisos to 10(10D) that place a further ₹2.5 lakh annual-premium ceiling on ULIPs issued on or after 1 February 2021, with an aggregation rule across multi-ULIP portfolios; breaches route the maturity through Section 45(1B) capital-gains treatment computed per Rule 8AD under CBDT Notification 8 of 2022. The Finance Act 2023 inserted Section 56(2)(xi) that catches non-ULIP policies issued on or after 1 April 2023 which fail 10(10D) — taxed at slab rate under Rule 11UACA. Getting all four streams to reconcile against Form 26AS and the AIS is the difference between a clean return and a Section 143(1) intimation with an unadjusted TDS credit.
For every maturing policy identify five attributes in sequence — policy issuance date, ULIP or non-ULIP classification, annual and aggregate premium schedule across the term, the sum assured, and the disability or severe-illness status of the policyholder. Apply the era-appropriate 10(10D) premium-to-sum-assured cap on the year-by-year premium schedule; a single-year breach anywhere in the term disqualifies the entire maturity from the exemption. For a ULIP issued on or after 1 February 2021 additionally apply the fourth-proviso single-policy ₹2.5 lakh annual-premium ceiling and the fifth-proviso multi-ULIP aggregation ceiling for the same FY. Where the exemption stands, the insurer skips 194DA and the policyholder discloses the payout as exempt under Schedule EI. Where the exemption fails for a ULIP, route the income component through Section 45(1B) capital gains — long-term at 12.5 percent above the ₹1.25 lakh exemption threshold under Section 112A where the ULIP is equity-oriented and held above 12 months, short-term at 20 percent under Section 111A otherwise. Where the exemption fails for a non-ULIP policy issued on or after 1 April 2023, route the income component through Section 56(2)(xi) at slab rate. In every failure case the insurer deducts 194DA at 5 percent on the income component and the policyholder claims the credit in Schedule TDS of the return.
Policy master with issuance date, product type (endowment, ULIP, term with return of premium, whole life, money-back), sum assured, annual premium schedule across the term, disability and severe-illness status of the policyholder, and maturity date. 10(10D) exemption evaluator that applies the second, third, fourth, fifth and sixth provisos on the policy-master inputs and returns the exemption status with the failing proviso and the failing year cited. ULIP portfolio aggregator that sums annual premium across all post-1-February-2021 ULIPs for the applicable FY and applies the fifth-proviso ceiling. Section 194DA computation module that pulls the income component (gross maturity minus aggregate premium paid) and deducts 5 percent where the exemption test fails and the aggregate FY payment from the insurer exceeds ₹1 lakh. Form 26Q return generator with payment-code 4DA breakup by policyholder PAN, migrating to Form 168 under the Income-tax Act 2025 from the new-Act commencement date. Section 45(1B) capital-gains computation engine per Rule 8AD with FIFO premium consumption across the ULIP portfolio and holding-period-based classification into Section 112A or Section 111A. Section 56(2)(xi) residuary head computation engine per Rule 11UACA for non-ULIP non-exempt policies from 1 April 2023 onward. Form 16A quarterly certificate generator for policyholder onward reconciliation. Cross-tie to the AIS Financial Transactions category for insurer reporting.
A per-policy tax-treatment memo showing issuance-era classification, ULIP or non-ULIP tag, applicable 10(10D) proviso cap, year-by-year premium-to-sum-assured ratio with the peak ratio flagged, exemption status with failing proviso and failing year cited where applicable, ULIP annual-premium check against ₹2.5 lakh ceiling with the fifth-proviso aggregation status. A per-policyholder Section 194DA ledger showing gross maturity paid, aggregate premium reduction, income component, 5 percent TDS deducted, Form 281 challan reference, Form 26Q or Form 168 quarterly line item, Form 16A certificate reference. A per-ULIP Section 45(1B) capital-gains schedule showing amount received, FIFO-consumed premium reduction, capital-gains amount, holding period, Section 112A or Section 111A classification, and tax rate. A per-non-ULIP Section 56(2)(xi) computation showing consideration received, premium reduction per Rule 11UACA, taxable amount and slab-rate application. An audit-ready evidence pack anchoring each 10(10D) exemption to the specific proviso and the policy-master premium schedule, each 194DA deduction to the income-component computation, each Section 45(1B) capital-gain to Rule 8AD, and each Section 56(2)(xi) charge to Rule 11UACA.
A Bengaluru-based policyholder — a senior finance director at a listed pharma company — closes her FY 2026-27 personal tax file and lays out three maturity events for the reconciliation walk. Policy one is an LIC New Endowment Plan sum assured ₹25 lakh issued in April 2006, term 20 years, annual premium ₹1.28 lakh, maturity payout ₹42.6 lakh including guaranteed additions and terminal bonus received in April 2026. Policy two is an HDFC Life Click 2 Wealth ULIP sum assured ₹45 lakh issued in March 2022, term 15 years, annual premium ₹3 lakh, surrendered in July 2026 at a fund value of ₹34.8 lakh after four premium instalments. Policy three is a Max Life Smart Total Elite Term Return-of-Premium plan sum assured ₹12 lakh issued in September 2015, term 20 years, annual premium ₹42,000, matured in September 2026 with a return-of-premium payout of ₹8.4 lakh. Three insurers, three different Section 10(10D) treatments, three different reconciliation drills against Form 26AS and the Annual Information Statement. The endowment sits comfortably inside the third-proviso 10 percent premium-to-sum-assured cap and the entire ₹42.6 lakh payout is exempt with no Section 194DA deduction. The ULIP, issued on 15 March 2022, sits squarely inside the Finance Act 2021 fourth-proviso window and its ₹3 lakh annual premium breaches the ₹2.5 lakh ceiling — the entire ₹34.8 lakh surrender value routes through Section 45(1B) capital gains computed per Rule 8AD, and HDFC Life deducts 5 percent Section 194DA on the ₹22.8 lakh income component at surrender. The term-return-of-premium plan, though issued after 1 April 2012, has a premium-to-sum-assured ratio of 3.5 percent — well inside the 10 percent cap — so the ₹8.4 lakh return-of-premium is exempt under 10(10D) with no Section 194DA. This is Section 194DA life insurance policy maturity Section 10(10D) India at production scale for a real household — and getting all three maturities to reconcile against Form 26AS, the AIS, Schedule EI, Schedule CG and Schedule TDS in the same return is the difference between a clean self-assessment and a Section 143(1) intimation with an unadjusted TDS credit and a Section 56 mis-classification exposure.
Quick reference
| Aspect | Detail |
|---|---|
| Section 194DA rate | 5% on the income component (Finance Act 2019 amendment effective 1 September 2019) |
| Section 194DA base | Sum received minus aggregate premium paid across the policy term |
| Section 194DA threshold | Aggregate FY payment from the insurer above ₹1 lakh per policyholder |
| Section 194DA introduction | Finance (No. 2) Act 2014 at 2%, reduced to 1% by Finance Act 2016 |
| Payment code — Income-tax Act 2025 | Section 394 read with Section 393 payment-code table, code 4DA carried forward |
| Section 10(10D) exemption base | Full exemption of any sum received under a life insurance policy, subject to provisos |
| Second proviso cap (2003 to 2012) | Premium in any year at or below 20% of actual capital sum assured |
| Third proviso cap (post-1 April 2012) | Premium in any year at or below 10% of actual capital sum assured |
| Third-proviso disability cap | 15% cap in place of 10% for Section 80U or 80DDB policies issued on or after 1 April 2013 |
| Fourth proviso — single ULIP | Post-1-February-2021 ULIPs with annual premium above ₹2.5 lakh disqualified |
| Fifth proviso — multi-ULIP | Aggregation rule — sum across post-2021 ULIPs above ₹2.5 lakh disqualifies excess |
| Sixth proviso — death benefit | Death benefit remains fully exempt regardless of premium ratio |
| Section 45(1B) route | Non-exempt ULIPs — capital gains computed per Rule 8AD, CBDT Notification 8/2022 |
| Rule 8AD computation | Amount received minus aggregate premium paid, FIFO consumption across multi-ULIP portfolios |
| Section 112A treatment | Long-term ULIP capital gains at 12.5% above ₹1.25 lakh threshold (equity-oriented, over 12 months) |
| Section 111A treatment | Short-term ULIP capital gains at 20% (equity-oriented, at or under 12 months holding) |
| Section 56(2)(xi) route | Non-ULIP non-exempt policies issued on or after 1 April 2023 — slab rate under Rule 11UACA |
| Missing-PAN escalation | Section 206AA — 20% or the 5% Section 194DA rate, whichever is higher |
| Deposit due date | 7th of the following month via Form 281 (30 April for March deductions) |
| Quarterly return — legacy | Form 26Q under the Income-tax Act 1961 |
| Quarterly return — new Act | Form 168 under the Income-tax Act 2025 |
| TDS certificate | Form 16A issued by the insurer to the policyholder |
What the life insurance maturity payout intersection actually looks like
A life insurance maturity payout in India is not a single tax event — it is the reconciliation of four independent statute streams that intersect on the same rupee. Section 194DA of the Income-tax Act 1961 governs the insurer’s withholding obligation. Section 10(10D) governs the substantive exemption — whether the sum received escapes total income entirely or falls to be taxed. The Finance Act 2021 fourth and fifth provisos to Section 10(10D) carved out a special regime for high-premium ULIPs issued from 1 February 2021 onward, with Section 45(1B) routing non-exempt ULIP proceeds to capital-gains treatment computed per Rule 8AD under CBDT Notification 8 of 2022. The Finance Act 2023 filled the residuary gap for non-ULIP non-exempt policies issued on or after 1 April 2023 through Section 56(2)(xi), taxed at the policyholder’s slab rate under Rule 11UACA.
The interlocks between the four streams are what make the reconciliation operationally hard. The insurer’s Section 194DA deduction is conditional on the failure of the Section 10(10D) exemption — a wrong exemption call at the insurer end either over-deducts (a policy the insurer wrongly classifies as non-exempt) or under-deducts (a policy the insurer wrongly classifies as exempt), and the policyholder inherits the reconciliation error at Form 26AS. The Section 45(1B) capital-gains treatment for non-exempt ULIPs runs on Rule 8AD computation with FIFO premium consumption across multi-ULIP portfolios, and a policyholder who surrenders two ULIPs in the same FY must apply the FIFO reduction consistently across both events or double-count the premium reduction. The Section 56(2)(xi) residuary head fires only for non-ULIP policies issued on or after 1 April 2023 — pre-2023 non-ULIP policies that fail 10(10D) fall to residual computation under the general Section 56(1) omnibus head without the Rule 11UACA machinery, a distinction the AIS pre-fill logic does not always get right on the first pass.
The Form 26AS reconciliation runs on the payment code 4DA which the insurer populates in the Form 26Q quarterly return; migration to Form 168 under the Income-tax Act 2025 carries the same code forward through the Section 393 payment-code table. The AIS pre-fill for the policyholder pulls the same insurer-reported line and displays it under the Financial Transactions category, and a Section 194DA entry there is a strong prima-facie indicator that the insurer treated the policy as non-exempt — a policyholder who believes the policy should be exempt has to raise a grievance-style TIS response and separately compute the exemption manually against the policy schedule to establish the position at return-filing time.
Section 194DA — the 5% deduction on the income component and the Finance Act 2019 amendment
Section 194DA was introduced by the Finance (No. 2) Act 2014 as a two percent deduction at source on the entire sum paid to a resident under a life insurance policy where the aggregate payment during the FY exceeded ₹1 lakh and the sum was not exempt under Section 10(10D). The Finance Act 2016 reduced the rate to one percent with effect from 1 June 2016, retaining the entire-sum-paid base. The Finance (No. 2) Act 2019 delivered two simultaneous changes with effect from 1 September 2019 — the rate was substituted to five percent, and, critically, the base was shifted from the entire sum paid to only the income comprised therein. This second change materially altered the mechanics.
Under the post-2019 configuration, the insurer computes the income comprised therein as the gross maturity payout, including any bonus, terminal bonus, guaranteed addition and any survival benefits paid to the policyholder in earlier years, minus the aggregate premium paid by the policyholder across all years of the policy term. On a ₹42.6 lakh maturity against a ₹25.6 lakh cumulative premium, the income component is ₹17 lakh and the 5 percent TDS is ₹85,000 — materially lower than the pre-2019 configuration which would have deducted 1 percent on the entire ₹42.6 lakh, or ₹42,600. The rate rise from 1 percent to 5 percent looks aggressive on face, but the base narrowing to the income component means the effective deduction on a typical endowment maturity dropped by about 40 percent to 60 percent.
Where the aggregate premium equals or exceeds the gross payout — a term return-of-premium plan, a money-back plan with cumulative survival benefits above premium paid, or a surrender-value calculation that returns less than the premium contributed — the income component is nil or negative and no TDS is deducted, even where the policy fails the Section 10(10D) exemption test. The insurer’s return-filing engine has to compute the income component per policy at the point of payment and populate the Form 26Q line accordingly, and a return that reports a positive TDS on a nil-income-component policy is a reconciliation break the policyholder can raise at Form 26AS review.
The ₹1 lakh aggregate FY threshold applies per insurer per policyholder per financial year. A policyholder who receives ₹80,000 from LIC and ₹60,000 from HDFC Life in the same FY, both on 10(10D)-failing policies, does not cross the threshold at either insurer — neither insurer deducts, and the policyholder is on her own to compute the taxable amount and self-assess at return filing. The aggregation is at the insurer-payee level, not at the payee-across-insurers level — a design choice that mirrors the general Chapter XVII-B threshold aggregation logic for TDS on interest (Section 194A) and dividends (Section 194).
Section 206AA of the Income-tax Act 1961 escalates the deduction to the higher of 20 percent or the rate in force where the policyholder fails to furnish PAN. For Section 194DA the higher of 20 percent and 5 percent is 20 percent — a fourfold escalation on the income component that concentrates the compliance discipline on the KYC-PAN linkage at the policy master. Insurers with a legacy tail of pre-KYC policies with missing or invalid PAN face a materially higher deduction at maturity, and a policyholder who never updated her PAN at the insurer after a name change or a KYC refresh cycle carries the escalation risk into the maturity payout.
Section 10(10D) — the exemption test with era-dependent premium caps and the disability special rule
Section 10(10D) begins with a broad exemption of any sum received under a life insurance policy, including the sum allocated by way of bonus. The exemption is then narrowed by six provisos that carve out policies with commercial-investment characteristics, high-premium ULIPs, and keyman insurance.
The first proviso withdraws the exemption for any sum received under a keyman insurance policy — a policy taken by a business on the life of an employee whose loss to the business would create a substantial economic hit. This is not a household-level concern.
The second proviso applies to policies issued on or after 1 April 2003 and up to 31 March 2012. It withdraws the exemption where the premium payable in any of the years during the term of the policy exceeds twenty percent of the actual capital sum assured. The rationale for the 20 percent cap in this era was that a genuine protection product should have a premium substantially lower than 20 percent of the sum assured; anything above that was likely to be an investment product masquerading as insurance.
The third proviso applies to policies issued on or after 1 April 2012. It tightens the premium-to-sum-assured cap from 20 percent to ten percent, reflecting the Finance Act 2012 legislative decision to draw the protection-versus-investment line more strictly. A special fifteen percent cap replaces the ten percent cap where the policyholder is a person with disability under Section 80U or suffers from a specified disease under Section 80DDB and the policy was issued on or after 1 April 2013 — this recognises that persons in these categories typically face higher mortality-adjusted premium pricing that would otherwise disqualify a genuinely protection-oriented policy at the 10 percent cap.
The premium test is applied in any of the years during the term of the policy, not on average. A policy where the premium is 8 percent of sum assured in years one to nineteen and 12 percent in the final year is fully disqualified from the exemption even though the average is under 10 percent. This is a design point insurers get wrong at product-launch actuarial testing time — a top-up premium option in a linked product that pushes the premium past the cap in any single year is fatal to the exemption for the entire maturity payout, not just the excess.
The sixth proviso preserves the exemption on the death benefit in every case, regardless of the premium ratio and regardless of the ULIP annual-premium ceiling introduced by the fourth and fifth provisos. This is not a narrow escape hatch — it is a substantive policy choice that pure death benefits (as distinct from survival or maturity benefits) sit outside the tax net entirely. A policyholder who takes a high-premium ULIP that fails both the fourth-proviso ₹2.5 lakh ceiling and the third-proviso 10 percent cap but dies during the policy term still passes a fully exempt death benefit to the nominees.
Finance Act 2021 — the fourth-and-fifth-proviso ₹2.5 lakh ULIP ceiling, Section 45(1B), Rule 8AD
The Finance Act 2021 inserted the fourth and fifth provisos to Section 10(10D) with effect from assessment year 2021-22, targeting the use of high-premium ULIPs as a tax-arbitrage vehicle. Under the pre-amendment position, a policyholder could pay a large annual premium on a ULIP, get equity-market-like returns inside the ULIP wrapper, and receive the maturity fully exempt under Section 10(10D) — a materially better outcome than a comparable mutual-fund investment which would attract long-term capital gains under Section 112A on redemption.
The fourth proviso withdraws the 10(10D) exemption for any unit-linked insurance policy issued on or after 1 February 2021 where the amount of premium payable for any of the previous years during the term of the policy exceeds two lakh fifty thousand rupees. The fifth proviso extends this to multi-ULIP portfolios — where a policyholder holds more than one ULIP issued on or after 1 February 2021 and the aggregate premium payable in any of the previous years exceeds ₹2.5 lakh, the exemption is available only for those ULIPs whose aggregate premium in the applicable year stays under the ceiling. The aggregation rule prevents a policyholder from breaking a ₹3 lakh annual-premium ULIP into two ₹1.5 lakh ULIPs to stay under the ceiling.
Section 45(1B) of the Income-tax Act 1961, also inserted by the Finance Act 2021, routes the non-exempt ULIP maturity through the capital-gains head. The computation runs on Rule 8AD of the Income-tax Rules 1962, notified by CBDT Notification 8 of 2022 dated 18 January 2022. The rule computes the capital gains as the amount received under the ULIP during the previous year, reduced by the aggregate premium paid during the term of the policy that has not been claimed as a deduction under any other provision of the Act. Where the policyholder holds multiple ULIPs and the fifth-proviso aggregation rule engages, the premium reduction is applied on a first-in-first-out basis — premium consumed in computing an earlier capital-gains event is not available for reduction in a subsequent event.
The holding period for classification runs from the date of allotment of units to the date of surrender, maturity or redemption. Where the ULIP is equity-oriented — defined as at least sixty-five percent of the policy’s underlying fund composition in equity — the classification is under Section 112A for long-term (over 12 months) at 12.5 percent above the ₹1.25 lakh exemption threshold under the post-Finance-Act-2024 configuration, and under Section 111A for short-term (12 months or less) at 20 percent. Where the ULIP is not equity-oriented — a debt-oriented fund composition or a balanced fund with sub-65 percent equity — the long-term classification falls to Section 112 at the standard rate and the short-term to slab rate. The insurer’s Section 194DA deduction at 5 percent on the income component sits parallel to the capital-gains computation and is available for credit in Schedule TDS of the policyholder’s return.
Section 56(2)(xi) — the residuary head for non-ULIP non-exempt policies from Finance Act 2023
The Finance Act 2023 inserted Section 56(2)(xi) into the Income-tax Act 1961 with effect from assessment year 2024-25, closing a gap that the Finance Act 2021 amendments had left open. The pre-2023 position for a non-ULIP policy that failed the 10(10D) exemption test — because the premium-to-sum-assured ratio breached the 10 percent cap under the third proviso, for instance — was that the taxable amount fell to residual computation under the general Section 56(1) omnibus head, without a specific computational rule. This created interpretive space for taxpayers to argue for concessional treatment on grounds that varied by facts.
Section 56(2)(xi) closes this space. Any sum received, including bonus, at any time during a previous year under a life insurance policy other than a ULIP, issued on or after 1 April 2023, which is not to be excluded from total income under Section 10(10D), is chargeable to income tax under the head Income from Other Sources at the policyholder’s slab rate. Rule 11UACA of the Income-tax Rules 1962 computes the taxable sum as the consideration received under the policy in the previous year reduced by the aggregate premium paid during the term of the policy that has not been claimed as a deduction under any other provision. A running reduction against premium consumed in earlier eligibility events in the same bucket prevents double-counting where the same policyholder has multiple non-ULIP non-exempt policies with sums received across successive years.
The Section 56(2)(xi) route applies only to policies issued on or after 1 April 2023 — pre-2023 non-ULIP policies that fail 10(10D) still fall to residual computation under Section 56(1) without the Rule 11UACA machinery. This creates a bright-line era distinction that insurers have to hold in the policy master, and a policyholder with a mixed portfolio spanning pre- and post-April-2023 non-ULIP non-exempt policies must apply the correct computation head to each.
The Finance Act 2023 also introduced a ₹5 lakh annual-premium threshold as an additional 10(10D) disqualifier for non-ULIP policies issued on or after 1 April 2023 — where the annual premium exceeds ₹5 lakh, the 10(10D) exemption is withdrawn even if the premium-to-sum-assured ratio stays under the third-proviso 10 percent cap. This is the non-ULIP mirror of the Finance Act 2021 fourth-proviso ₹2.5 lakh ULIP ceiling, calibrated at a higher threshold to reflect the different economics of a non-ULIP protection-plus-savings product. A policyholder with a large sum assured of, say, ₹1 crore and a corresponding premium of ₹6 lakh sits under the 6 percent ratio (well inside the 10 percent cap) but above the ₹5 lakh annual-premium threshold — the exemption is withdrawn on the annual-premium ground alone and the maturity routes through Section 56(2)(xi).
Worked example — the three-policy walk from the opening scenario
The Bengaluru senior finance director from the opening paragraph runs the annualised reconciliation for the three maturity events in FY 2026-27. Cumulative sum received across all three policies: ₹85.8 lakh. Cumulative premium paid across all three policies: ₹58.4 lakh. Cumulative income component: ₹27.4 lakh. What follows is the per-policy breakdown.
Illustrative — the figures below are representative of the operating pattern for a household-level personal tax computation across three concurrent maturity events, not actual policyholder data. Cross-verify against your own policy schedules, insurer Form 16A certificates, the FY-applicable Section 10(10D) proviso text and the CBDT Notification 8/2022 Rule 8AD language before action.
Policy 1 — LIC New Endowment Plan sum assured ₹25 lakh, issued April 2006, matured April 2026:
- Policy issuance date: April 2006 — falls inside the second-proviso window (1 April 2003 to 31 March 2012)
- Applicable 10(10D) cap: 20 percent premium-to-sum-assured ratio
- Sum assured: ₹25,00,000
- Annual premium: ₹1,28,000 (constant across the 20-year term)
- Premium-to-sum-assured ratio: 5.12 percent — well inside the 20 percent cap
- 10(10D) exemption: available in full
- Gross maturity payout including bonus and terminal bonus: ₹42,60,000
- Aggregate premium across term: ₹25,60,000
- Income component: ₹17,00,000 (arithmetic only — not brought to tax because 10(10D) applies)
- Section 194DA deduction by LIC: Nil (10(10D) exemption applies)
- Reporting on Schedule EI (Exempt Income) of the return: ₹42,60,000 with 10(10D) reason code
- Form 26AS 194DA entry: absent (correct)
Policy 2 — HDFC Life Click 2 Wealth ULIP sum assured ₹45 lakh, issued 15 March 2022, surrendered July 2026:
- Policy issuance date: 15 March 2022 — falls inside the fourth-proviso window (on or after 1 February 2021)
- Product classification: ULIP
- Sum assured: ₹45,00,000
- Annual premium: ₹3,00,000 (four instalments paid before surrender)
- Aggregate premium paid at surrender: ₹12,00,000
- Fourth-proviso ceiling test: annual premium ₹3 lakh above the ₹2.5 lakh ceiling — 10(10D) exemption withdrawn on the fourth-proviso ground
- Fifth-proviso aggregation: not applicable (no other post-2021 ULIP held)
- Fund value at surrender: ₹34,80,000
- Income component (Rule 8AD): ₹34,80,000 minus ₹12,00,000 aggregate premium equals ₹22,80,000
- Section 194DA deduction by HDFC Life at 5 percent on income component: ₹1,14,000
- Form 281 challan deposit by HDFC Life: within 7th of August 2026 for the July 2026 deduction
- Form 26Q line item: payee PAN, gross sum ₹34,80,000, income component ₹22,80,000, TDS ₹1,14,000, payment code 4DA
- Form 16A certificate: issued by HDFC Life on the second-quarter 26Q filing
- Holding period: 15 March 2022 to July 2026 is 52 months — long-term
- ULIP equity composition: the Click 2 Wealth policy is equity-oriented if the underlying fund is at least 65 percent equity; assume 100 percent equity fund selected
- Section 112A classification: long-term capital gain at 12.5 percent above the ₹1.25 lakh exemption threshold
- Capital gain above threshold: ₹22,80,000 minus ₹1,25,000 equals ₹21,55,000
- Tax at 12.5 percent: ₹2,69,375
- Less TDS credit claimed in Schedule TDS: ₹1,14,000
- Net tax payable on Policy 2 in the return: ₹1,55,375
- Reporting in Schedule CG (Capital Gains) of the return: ₹22,80,000 gross with Section 45(1B) classification, computed per Rule 8AD
Policy 3 — Max Life Smart Total Elite Term Return-of-Premium sum assured ₹12 lakh, issued September 2015, matured September 2026:
- Policy issuance date: September 2015 — falls inside the third-proviso window (on or after 1 April 2012)
- Product classification: term with return of premium (non-ULIP)
- Sum assured: ₹12,00,000
- Annual premium: ₹42,000 (constant across the 20-year term)
- Premium-to-sum-assured ratio: 3.5 percent — inside the 10 percent cap
- 10(10D) exemption: available in full
- Return-of-premium payout at maturity: ₹8,40,000 (representing the sum of premiums paid net of mortality charge, per the product’s return-of-premium schedule)
- Aggregate premium across term: ₹8,40,000
- Income component: nil (payout equals aggregate premium)
- Section 194DA deduction by Max Life: Nil (10(10D) exemption applies; income component nil in any case)
- Reporting on Schedule EI of the return: ₹8,40,000 with 10(10D) reason code
- Form 26AS 194DA entry: absent (correct)
Consolidated reconciliation position:
- Cumulative sum received across three policies: ₹85,80,000
- Cumulative premium paid across three policies: ₹46,00,000 (₹25,60,000 endowment plus ₹12,00,000 ULIP plus ₹8,40,000 TROP)
- Cumulative income component across three policies: ₹39,80,000 (₹17,00,000 endowment plus ₹22,80,000 ULIP plus nil TROP)
- Cumulative taxable amount: ₹22,80,000 (only Policy 2)
- Cumulative Section 194DA deducted: ₹1,14,000 (only HDFC Life on Policy 2)
- Cumulative Section 45(1B) tax at Section 112A rate: ₹2,69,375
- Net tax payable across the three policies after TDS credit: ₹1,55,375
- Aggregate 10(10D) exempt reporting on Schedule EI: ₹51,00,000 (₹42,60,000 endowment plus ₹8,40,000 TROP)
Cross-audit points:
- Policy 1’s absence of a Form 26AS 194DA entry must be affirmatively verified against LIC’s issued receipt — a missing entry could equally reflect an LIC processing lag as opposed to correct exemption treatment; the receipt narration and the Schedule EI disclosure together anchor the exemption position.
- Policy 2’s HDFC Life 194DA deduction of ₹1,14,000 must reconcile to the Form 26AS entry and the Form 16A certificate; the income component of ₹22,80,000 shown on the certificate must match the Rule 8AD computation the policyholder runs in Schedule CG.
- Policy 3’s return-of-premium payout of ₹8,40,000 equalling the aggregate premium paid produces a nil income component — the reconciliation must confirm the payout equals or is under the aggregate premium; where the return of premium exceeds the aggregate (some products return premium plus a small bonus), the income component is positive and the 5 percent Section 194DA applies where the exemption fails.
- Policy 2’s holding period classification into Section 112A requires the ULIP to be equity-oriented at surrender date — where the underlying fund composition drops below 65 percent equity in the final year, the classification falls to Section 112 for long-term treatment (and the AIS pre-fill for that year has to be corrected in the TIS response).
The Form 26AS-side reconciliation drill for insurer-side TDS credits is at Form 26AS reconciliation for auto component supplier and the AIS-side reconciliation is at AIS and TIS reconciliation India.
Common reconciliation breakages
- Insurer over-deducts Section 194DA on a genuinely exempt policy — the insurer’s policy master fails to identify the correct issuance-era proviso for a legacy policy (typically a 1990s or pre-2003 policy) and the exemption evaluator returns a false negative, producing a Section 194DA deduction that flows into Form 26AS and shows up in the policyholder’s AIS Financial Transactions category as a taxable insurer payment; the policyholder has to raise a Section 154 rectification or file the return with the exemption position on Schedule EI and separately reconcile the TDS credit.
- Fourth-proviso ULIP ceiling missed on a top-up premium — a policyholder who pays the base annual premium of ₹2.4 lakh on a post-1-February-2021 ULIP additionally makes a ₹30,000 top-up premium in the same year, taking the aggregate annual premium to ₹2.7 lakh — above the ₹2.5 lakh ceiling — and the insurer’s premium-tracking system fails to consolidate the top-up into the base for the fourth-proviso test; the exemption is wrongly retained at maturity and the eventual assessment strips it out with interest under Section 234B.
- Section 45(1B) capital-gains computation uses gross received without Rule 8AD premium reduction — a policyholder or her tax filer computes the taxable capital gain on a non-exempt ULIP as the full amount received without reducing by the aggregate premium paid, producing a materially higher tax liability than the Rule 8AD-compliant computation; the correct base is the amount received minus the aggregate premium paid (FIFO across multi-ULIP portfolios).
- Section 56(2)(xi) applied to a pre-1-April-2023 non-ULIP policy — a policyholder or her tax filer wrongly routes a pre-2023 non-ULIP non-exempt maturity through Section 56(2)(xi) at slab rate under Rule 11UACA, when the correct computation is under the general Section 56(1) residual head; the two rates and the two computation bases can differ, and the AIS pre-fill logic sometimes suggests the Section 56(2)(xi) classification even for pre-2023 policies because the pre-fill runs on the receipt year rather than the issuance year.
- Section 194DA payment-code mis-mapping in Form 26Q — the insurer’s payroll or benefits engine that runs the maturity payment run mis-maps the payment head to a general 194J or 194A code instead of the 194DA-specific 4DA code, producing a Form 26AS entry under the wrong section head that the policyholder cannot match against the maturity payout; the insurer has to file a correction return with the correct payment code before the policyholder can reconcile.
- Multi-insurer aggregation misapplied on the ₹1 lakh 194DA threshold — a policyholder receives ₹80,000 from LIC and ₹60,000 from HDFC Life in the same FY on 10(10D)-failing policies and expects neither insurer to deduct (correct, because the ₹1 lakh threshold is at the insurer-payee level), but the tax filer wrongly aggregates the two across insurers and assumes a 194DA credit is available in Form 26AS that never got deducted; the return then falsely claims a TDS credit that generates a Section 143(1) intimation.
- Fifth-proviso multi-ULIP aggregation missed across insurers — a policyholder holds a ₹2.4 lakh annual-premium post-2021 ULIP with HDFC Life and a ₹2 lakh annual-premium post-2021 ULIP with SBI Life; the aggregate annual premium is ₹4.4 lakh, above the ₹2.5 lakh ceiling; the fifth proviso aggregation rule engages and the exemption is available only for the SBI Life policy (which was issued first, so its full ₹2 lakh premium is inside the ceiling) and disqualified for the HDFC Life policy; each insurer individually treats its policy as exempt because the aggregation is not visible at the insurer’s own vantage — the policyholder must apply the aggregation manually at return-filing time.
How a reconciliation platform handles this
An audit-defensible life insurance maturity reconciliation platform holds a per-policyholder policy master with issuance date, product type (endowment, ULIP, term with return of premium, whole life, money-back), sum assured, annual and top-up premium schedule across the term, disability and severe-illness status under Section 80U and 80DDB, and maturity date. A Section 10(10D) exemption evaluator applies the second, third, fourth, fifth and sixth provisos against the policy-master inputs and returns the exemption status with the failing proviso and the failing year explicitly cited. A ULIP portfolio aggregator sums annual premium across all post-1-February-2021 ULIPs for the applicable FY and applies the fifth-proviso ₹2.5 lakh aggregate ceiling. A Section 194DA computation module runs the income-component calculation (gross maturity minus aggregate premium paid) and deducts 5 percent where the exemption test fails and the aggregate FY payment from the insurer exceeds ₹1 lakh. A Form 26Q return generator populates the payment-code 4DA breakup by policyholder PAN, migrating to Form 168 under the Income-tax Act 2025 from the new-Act commencement date. A Section 45(1B) capital-gains computation engine runs Rule 8AD with FIFO premium consumption across the ULIP portfolio and classifies the gain into Section 112A or Section 111A depending on the ULIP’s equity composition and the holding period. A Section 56(2)(xi) residuary head computation engine runs Rule 11UACA for non-ULIP non-exempt policies issued on or after 1 April 2023. A Form 16A quarterly certificate generator produces the certificate for onward policyholder reconciliation, and cross-ties to the AIS Financial Transactions category for insurer reporting. Full posture at TDS reconciliation software India and the broader income-tax return preparation stack at reconciliation software India.
For insurers running this at scale — where a mid-sized private life insurer with ₹15,000 crore of assets under management may carry 8 lakh to 12 lakh active policies across endowment, ULIP, term, money-back and pension product classes, and a public-sector giant like LIC carries multi-crore active policies across seven product classes and dozens of legacy variants — the difference between a per-policy exemption evaluator with era-appropriate proviso logic and a manual case-by-case treatment is the difference between the audit-clean quarterly Form 26Q filing and a rolling series of correction returns and Section 154 rectifications initiated by policyholders whose exemption calls were wrongly denied at maturity. For policyholders — especially high-net-worth policyholders with multi-ULIP portfolios spanning pre- and post-1-February-2021 issuance windows and mixed non-ULIP policies spanning pre- and post-1-April-2023 issuance dates — the compliance walk at each maturity event is dense enough to warrant a per-policy tax-treatment memo before the return-filing pass. The five FAQs below address the operational questions Indian life insurance policyholders and their tax advisors ask most often when structuring the maturity-year reconciliation to survive scrutiny under Section 143(1) intimation, Section 154 rectification and Section 143(2) selection.
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- ▸ Section 194DA, Income-tax Act 1961 — Any person responsible for paying to a resident any sum under a life insurance policy, including the sum allocated by way of bonus on such policy, other than the amount not includible in the total income under clause (10D) of section 10, shall, at the time of payment thereof, deduct income-tax thereon at the rate of five percent on the amount of income comprised therein. Provided that no deduction under this section shall be made where the amount of such payment or, as the case may be, the aggregate amount of such payments to the payee during the financial year is less than one hundred thousand rupees. The five percent rate and the income-component base were substituted by the Finance (No. 2) Act 2019 with effect from 1 September 2019 — the pre-amendment position was a one percent deduction on the entire sum paid (originally two percent at introduction by the Finance (No. 2) Act 2014, reduced to one percent by the Finance Act 2016).
- ▸ Section 10(10D), Income-tax Act 1961 — Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, is not to be included in the total income of the recipient. The first proviso withdraws the exemption for keyman insurance policies. The second proviso withdraws it for policies issued on or after 1 April 2003 and up to 31 March 2012 where the premium payable in any of the years during the term of the policy exceeds twenty percent of the actual capital sum assured. The third proviso withdraws it for policies issued on or after 1 April 2012 where the premium payable exceeds ten percent of the actual capital sum assured, with a fifteen percent cap in place of the ten percent cap for persons with disability under Section 80U or specified diseases under Section 80DDB for policies issued on or after 1 April 2013. The fourth and fifth provisos (inserted by the Finance Act 2021 with effect from assessment year 2021-22) withdraw the exemption for unit-linked insurance policies issued on or after 1 February 2021 where the annual premium exceeds two lakh fifty thousand rupees, or where the aggregate annual premium across multiple ULIPs exceeds that sum. The sixth proviso preserves the exemption on the death benefit in every case.
- ▸ Section 45(1B), Income-tax Act 1961 (inserted by Finance Act 2021) — Where any person receives at any time during any previous year any amount under a unit-linked insurance policy to which the exemption under clause (10D) of section 10 does not apply on account of the fourth or fifth proviso to that clause, then any profits or gains arising from receipt of such amount by such person shall be chargeable to income-tax under the head Capital Gains and shall be deemed to be the income of such person of the previous year in which such amount was received. The income taxable shall be computed in such manner as may be prescribed. Rule 8AD of the Income-tax Rules 1962, notified through Notification 8 of 2022 dated 18 January 2022, prescribes the computation as the amount received under the ULIP reduced by the aggregate of the premiums paid during the term of the policy that have not been claimed as a deduction under any other provision of the Act, with first-in-first-out consumption of premium across multiple ULIPs where the fifth-proviso aggregation rule engages.
- ▸ Section 56(2)(xi), Income-tax Act 1961 (inserted by Finance Act 2023) — Any sum received, including the amount allocated by way of bonus, at any time during a previous year under a life insurance policy (other than a unit-linked insurance policy) issued on or after 1 April 2023, which is not to be excluded from the total income of the previous year in accordance with the provisions of clause (10D) of section 10, shall be chargeable to income-tax under the head Income from Other Sources. The income shall be computed in the manner prescribed under Rule 11UACA of the Income-tax Rules 1962 — the consideration received under the policy in the previous year reduced by the aggregate of the premiums paid during the term of the policy that have not been claimed as a deduction under any other provision of the Act, with a running reduction of consumed premium against any earlier sums that were already exempt or taxed in the same eligibility bucket. The residuary head applies where a non-ULIP policy fails the 10(10D) exemption test — typically because the annual premium exceeds five lakh rupees for a Finance Act 2023 policy or the premium-to-sum-assured cap under the second or third proviso is breached.
- ▸ CBDT Notification 8 of 2022 dated 18 January 2022 — Rule 8AD — For the purposes of sub-section (1B) of section 45, the capital gains arising from receipt of any amount under a unit-linked insurance policy to which the exemption under clause (10D) of section 10 does not apply shall be computed as the amount received under the ULIP during the previous year, reduced by the aggregate amount of premium paid during the term of the said ULIP till the date of receipt of the amount referred to therein that has not been claimed as a deduction under any other provision of the Act. Where a person holds multiple ULIPs and the fifth-proviso aggregation rule engages, the premium reduction is applied on a first-in-first-out basis and premium consumed in computing an earlier capital-gains event is not available for reduction in a subsequent event. The holding period for classification as long-term or short-term capital asset runs from the date of allotment of units to the date of surrender, maturity or redemption, and the equity-oriented ULIP is taxed under Section 112A where the equity component is at least sixty-five percent of the policy's underlying fund composition.
- ▸ Section 393 and Section 394, Income-tax Act 2025 — The Income-tax Act 2025 consolidates the erstwhile Chapter XVII-B deduction-at-source regime into Section 393 (persons required to deduct) and Section 394 (rate and mode of deduction) with a payment-code table carrying forward each legacy Section 194-series head to a corresponding code. The Section 194DA head migrates as a distinct entry with the five percent rate, the one lakh rupees aggregate financial-year threshold and the income-component base preserved from the Finance Act 2019 configuration, and the mutual-exclusion with the Section 10(10D) exemption is carried forward through a direct cross-reference to the successor exemption clause in the new Act. Insurer-side quarterly reporting migrates from Form 26Q under the Income-tax Act 1961 to Form 168 under the Income-tax Act 2025 from the new-Act commencement date onward, and the challan retains the Section 393 code lineage for reconciliation continuity across the cross-era boundary.