Insurance and tax after the 2025 Act

Tax is the most common reason given for buying insurance in India and the weakest one. This chapter explains the structure, and is deliberately careful about numbers.

A warning about everything you will read

The Income-tax Act, 1961 was repealed with effect from 1 April 2026 and replaced by the Income-tax Act, 2025. The Tax subject covers what that changed: the restructuring did not impose new taxes, but section numbers from the 1961 Act no longer refer to live provisions.

The consequence for this subject is severe, because insurance tax advice is unusually dependent on section numbers — "80C", "10(10D)" and "80D" are practically the vocabulary of the sales conversation.

And the stale citations are not confined to marketing. IRDAI's own Master Circular on Life Insurance Products, in its actuarial pricing requirements, directs insurers to "the relevant sections of the Income Tax Act, 1961, as amended from time to time." That is a regulator's current circular citing repealed legislation.

So encountering an old section number tells you nothing about whether the advice is current — it is the normal state of published material, including official material, during a transition. The substance behind most provisions survived; the citations did not.

This chapter therefore teaches the structure and does not quote thresholds. Where you need a specific figure — a premium limit, a percentage of sum assured, an aggregate cap — take it from the current Act or a current Income Tax Department page, not from a brochure, not from an article, and not from here.

The three stages, applied to insurance

The framework from Deposits and small savings transfers directly. Any insurance-linked savings product can be taxed at three points:

On the way in — is the premium deductible?

During accumulation — is the growth inside the policy taxed as it accrues?

On the way out — are the maturity proceeds, survival benefits or surrender value taxable?

Insurance's structural advantage is the middle stage. Growth inside a policy is generally not taxed year by year, which is the same advantage a fund has and a deposit does not. That is real, and it is why the EEE question matters more than the headline.

The death benefit is the clearest case. A sum assured paid on death is the part of insurance whose exempt treatment is least contested, and it is also the part people are least interested in when buying.

Conditions attach, and they exist for a reason

The exemption of maturity proceeds is not unconditional, and the conditions have tightened over successive Finance Acts. They operate on two axes:

A relationship between premium and sum assured. A policy whose premium is large relative to its cover is mostly an investment wearing an insurance label, and the law has long drawn a line at some proportion.

Aggregate premium thresholds. Above a stated annual total — assessed across policies — the exemption is restricted, with separate treatment for unit-linked and traditional policies.

The direction of travel is what matters here, and it is consistent: the more a product behaves like an investment rather than protection, the less favourable its treatment. The tax system has been progressively withdrawing the advantage from exactly the products this subject has been cautioning about.

Which has a planning consequence. A high-premium savings policy bought today for its tax treatment is buying into a benefit that has been narrowed repeatedly and may narrow again, under a contract you cannot cheaply exit — chapter 3's surrender arithmetic. Tax rules change far faster than a twenty-year policy matures.

Health insurance premiums have their own deduction, with limits that vary by the age of those covered. The same caution applies: verify the current figures.

Why tax should not decide the purchase

Three reasons, in order of force.

A deduction is worth your marginal rate, once. At a 30% slab, ₹1,00,000 of deductible premium saves ₹30,000 — in that year. A product returning two or three points less than the alternative gives that back within a few years and keeps giving it back for the remaining term.

The allowance is shared. As the EEE chapter set out, a single ceiling covers a group of eligible investments together. Someone already exhausting it through a home loan principal repayment or a PPF contribution gets no marginal benefit from a new policy, and should evaluate it on its return and its cover alone — which, for most of the products in chapters 3 and 4, is a much harder sell.

You are buying a long contract against a short rule. The policy runs twenty years; the tax treatment is reviewed annually.

The Tax subject states the general principle and it is the right one: the tax tail wagging the investment dog is the most expensive habit in personal finance. This subject is where it is most expensive, because the contracts are longest and the exits costliest.

Working the problem

A seller claims a policy is "completely tax free" and therefore better than a mutual fund.

What I would verify:

1. Which stages are actually exempt — premium, accumulation, maturity. "Completely tax free" is a claim about all three and is rarely true of all three.
2. Whether the conditions are met for this policy — the premium-to-sum-assured relationship and any aggregate premium threshold, checked against the current Act rather than a brochure.
3. Whether my aggregate premiums across all policies cross any threshold, since these are assessed in aggregate rather than per policy.
4. Whether my deduction allowance is already exhausted elsewhere, which would make the entry-stage benefit zero for me specifically.
5. What happens on surrender rather than maturity, which is how most policies actually end and is often treated differently.
6. The source for every claim — and whether it cites the 1961 Act, which would tell me the advice has not been refreshed since the repeal.

What I would conclude if every claim turned out to be true:

That the tax treatment is favourable, and that this still does not decide it.

The comparison is not "tax-free policy against taxable fund". It is the whole package: the policy's return, computed as an XIRR by chapter 6's method, against a mutual fund's return net of its tax — and separately the policy's sum assured against term cover bought for the same money.

A policy returning around 5% tax-free is not obviously better than a fund returning 11% before tax. Run the arithmetic rather than accepting the framing, because the framing compares one attribute and the decision depends on all of them.

And the cover question is independent of tax entirely. If the policy provides ₹12.5 lakh of cover where the household needs ₹1.8 crore, no tax treatment repairs that. A family whose earner dies is not consoled by the exemption.

The honest summary: tax treatment is a legitimate tie-breaker between two products that are otherwise comparable. It is never a reason to buy a product that is worse at the job you needed done.

The point

Insurance can be taxed at contribution, during accumulation and at withdrawal, and its genuine structural advantage is the middle stage, where growth inside the policy is not taxed year by year. The maturity exemption carries conditions on the ratio of premium to sum assured and on aggregate premiums, and those conditions have tightened consistently in one direction — the more a product behaves like an investment, the less favourable its treatment. Because the Income-tax Act 1961 was repealed in April 2026, most published references, including IRDAI's own circular, still cite provisions that no longer exist, so take every figure from the current Act. A deduction is worth your marginal rate once, the allowance is shared, and no tax treatment repairs a sum assured that is too small.