Endowment maturity can be taxable if premiums top ₹5 lakh

An exemption with a ceiling

Maturity proceeds from a life insurance policy have long been tax-free, which is one reason endowment and money-back policies are sold as "tax-efficient". For policies issued on or after 1 April 2023, there is a ceiling. If the total yearly premium on your non-ULIP policies is more than ₹5 lakh, the maturity gain on the policies above the limit is taxed instead of exempt. The old exemption was section 10(10D); the Income-tax Act 2025, in force from 1 April 2026, carries it forward under a new number without changing the logic.

Unit-linked plans have their own, lower ceiling of ₹2.5 lakh a year, which is covered in our ULIP vs term and mutual funds guide. This post is about traditional plans, the ₹5 lakh limit and what crossing it costs.

What the rule does and does not touch

• Applies to: non-ULIP life policies issued on or after 1 April 2023, when the aggregate premium payable in a year exceeds ₹5 lakh.
• Does not apply to: the death benefit, which stays exempt. Older policies are governed by the conditions that applied when they were issued, including the earlier limits on premium as a share of the sum assured.
• Counts: the premium for all such policies together, not each one separately.

The gain that becomes taxable is, broadly, the amount you receive less the premiums you paid, added to income in the year of receipt and taxed at your slab rate.

A worked case

The numbers below are hypothetical, chosen to show the mechanics. They are not a quote for any product.

The "up to" is the 30% slab plus 4% cess on the full gain: ₹25 lakh × 31.2% = ₹7.8 lakh. In practice the gain lands on top of the rest of that year's income, so some of it may be taxed in lower slabs if other income is small. For a person already earning well, nearly all of it sits in the top slab.

The two columns show how the gap opens. The over-the-limit policy has a gain that is ₹4.6 lakh larger before tax, because its premiums are ₹1.1 lakh a year higher, but it leaves ₹3.2 lakh less in hand. Crossing the line by ₹1.1 lakh a year turns an exempt return into a taxed one.

The cliff and the two-policy trap

The test is on the aggregate premium. Two policies of ₹3 lakh a year each, one bought for a spouse's goal and one for a child's, add up to ₹6 lakh. A single ₹5,00,000 premium is within the limit; ₹5,00,001 is not.

For several policies, which gains are taxed can depend on how the limit is applied across them, and the rules for choosing are technical. If you hold more than one policy, ask a chartered accountant how your own combination is treated before the maturity year rather than after it.

How to read the tax in your own plan

1. Check the issue date. Policies issued before 1 April 2023 are outside the ₹5 lakh test.
2. Add up the yearly premium across all non-ULIP policies issued on or after that date.
3. If you are over, estimate the gain as expected maturity value minus total premiums.
4. Think about the year of receipt. A large lump of taxable income in one year costs more than the same gain spread over several.

Where this fits

None of this makes a traditional plan better or worse; it changes the arithmetic of one feature. Insurance cover and savings are separate jobs, and the way each is priced is worth comparing. Our term vs endowment explainer sets out the cover side of that comparison, and the LIC surrender vs mutual fund calculator can help with an existing policy.

Whether the figure will matter to you depends on one thing: whether your total yearly premium is above ₹5 lakh. For most households it is not, which is exactly why the number is worth checking before you buy a second or third policy.

Illustrative figures; the maturity amount is assumed. This describes the rule as understood at the time of writing and is not tax advice. Rules, thresholds and section numbers change, so confirm with a tax professional.