Are Guaranteed Income Plans Tax-Free? The ₹5 Lakh Rule
Tax-free income is the biggest reason high-income families buy guaranteed income plans. But since April 2023, "tax-free" comes with conditions, and a lot of people are buying policies that will be taxed without realising it. Here are the rules in plain language.
The short answer
- Death benefit: always tax-free.
- Income + maturity: tax-free if total yearly premium (policies from 1 Apr 2023) is ≤ ₹5 Lakh and life cover is ≥ 10× the premium.
- Cross either line and the gain becomes taxable at your slab rate.
In this article
The two conditions for tax-free payouts
For a guaranteed income plan's regular income and maturity amount to be tax-free, both of these must hold:
- Premium limit: the total yearly premium of all your non-ULIP life policies issued on or after 1 April 2023 is not more than ₹5 Lakh.
- Cover condition: the premium in any year is not more than 10% of the sum assured (i.e. life cover is at least 10× the premium). The limit is 15% for persons with certain disabilities or specified diseases.
The death benefit paid to your nominee is tax-free regardless of either condition.
How the ₹5 Lakh limit works
The limit is on your total premium, not per policy. It counts only traditional (non-ULIP) policies issued on or after 1 April 2023. Older policies, term insurance and ULIPs (which have their own ₹2.5 Lakh rule) are counted separately.
| Situation | Total new-policy premium | Tax on payouts |
|---|---|---|
| One plan, ₹5 L a year | ₹5 L | Tax-free ✓ |
| One plan, ₹2.5 L + another endowment, ₹2 L | ₹4.5 L | Both tax-free ✓ |
| One plan, ₹4 L + a child plan, ₹2 L | ₹6 L | One of them taxable — you choose which stays exempt |
| One plan, ₹10 L a year | ₹10 L | Taxable ✗ |
| A 2019 endowment, ₹3 L + new plan, ₹5 L | ₹5 L (2019 policy not counted) | New plan tax-free ✓ |
When the limit is crossed, the payouts are taxed as income from other sources, broadly on what you receive minus the premiums you paid (and did not claim as a deduction). The exact calculation for a stream of yearly income is technical, so get a CA's view if you're above the limit.
The calculator flags it when your premium crosses the tax-free limit.
See my numbers → All insurance plansThe 10× life cover condition people miss
Many guaranteed income plans let you pick a life-cover multiple, and for buyers aged 45 and above the default is often 7× the premium. At 7×, the premium is about 14% of the cover, above the 10% limit, so the payouts may not be tax-free even if you pay just ₹1 Lakh a year.
Before you sign, look at the benefit illustration and check: sum assured ÷ yearly premium ≥ 10. If you're 45+, ask whether a 10× option is available and what it costs in income.
Premium deduction: old vs new regime
| Old tax regime | New tax regime (default) | |
|---|---|---|
| Deduction for premium | Yes, within the overall ₹1.5 L limit for specified savings | No |
| Tax-free payouts (if both conditions met) | Yes | Yes |
| Death benefit | Tax-free | Tax-free |
The good news: tax-free payouts depend on the conditions above, not on your regime. Even in the new regime, a plan within the limits gives tax-free income.
A note on the law: the new Income-tax Act, 2025 replaced the 1961 Act from April 2026 and renumbered the sections you may remember. The substance of these rules has carried over, but always check the current position before investing large amounts.
What tax-free is actually worth
A typical pay-10, get-30 plan returns about 6.45% a year. To get the same in your hand from a taxable FD, you'd need:
| Your tax slab (incl. cess) | Equivalent taxable FD rate |
|---|---|
| 10% (≈ 10.4%) | ≈ 7.2% |
| 20% (≈ 20.8%) | ≈ 8.1% |
| 30% (≈ 31.2%) | ≈ 9.4% |
| 30% + surcharge (≈ 39%) | ≈ 10.6% |
For someone in the top slab, that is a strong, locked-in return. For someone in the 10% slab, the tax benefit matters much less, and flexibility may be worth more. This is why guaranteed income plans make the most sense for high-income earners who keep premiums within ₹5 Lakh.
Investing more than ₹5 Lakh? Your options
- Split across family members: the limit is per person. A spouse with their own income can hold a plan in their own name (the premium should come from their own income).
- Accept partial taxation: the plan above the limit still gives certainty; compare its post-tax IRR with alternatives.
- Use other guaranteed sources: PPF (₹1.5 L/yr, tax-free), and at 60+, SCSS and Post Office MIS.
- Add equity for the rest: mutual funds for long-term growth; see guaranteed income vs SWP.
More on retirement tax: how your retirement corpus is taxed in India.
Frequently asked questions
Is the income from a guaranteed income plan tax-free?
It can be. For policies issued on or after 1 April 2023, income and maturity are tax-free only if the total yearly premium across all such non-ULIP life policies is within ₹5 Lakh, and the premium is not more than 10% of the sum assured (life cover). Death benefit is always tax-free.
What happens if my premium is more than ₹5 Lakh a year?
The payouts from the policies above the limit become taxable as income, broadly on the amount received minus the premiums paid that were not claimed as a deduction. You can choose which policies to keep within the ₹5 Lakh exempt limit.
Does the ₹5 Lakh limit apply per policy or in total?
In total: it is the aggregate premium of all traditional (non-ULIP) life policies issued on or after 1 April 2023 that you hold. Policies issued before that date are not counted.
Can I claim a tax deduction on the premium?
Only under the old tax regime, within the overall ₹1.5 Lakh deduction limit for specified savings. The new tax regime, which is the default, does not allow this deduction.
Did the new Income-tax Act 2025 change these rules?
The new Act, effective from April 2026, reorganised and renumbered the sections, but the ₹5 Lakh premium limit and the life-cover condition for tax-free payouts were carried forward. Check the latest position with a CA before a large purchase.
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