Taxable returns from a life insurance policy can be computed after considering section 194DA and section 10(10D). Section 194DA was introduced by Finance Act, 2014.
- Premium paid is not more than 20% of the sum assured (Policy is bought between 01stApril 2003 and 31st April 2012) or
- Premium paid is not more than 10% of the sum assured (Policy is bought after 31stApril 2012)
As per newly introduced section 194DA, the tax shall be deducted at source on any amount equal to or over Rs. 100,000 paid to the insured at maturity provided such amount is not exempt under section 10(10D).
The tax shall be deducted at
- 2% if PAN is available and valid and
- 20% if PAN is not available or invalid.
Thus, from a combined reading of both sections, we can conclude that TDS will not be deducted if the amount is exempt under section 10(10D).
Types of Insurance Policies
Life Insurance covers are of various types. They can be broadly classified into endowment plans, term plans, and ULIPs. With the advent of hybrid insurance products, the purpose of insurance is not limited to life cover alone. It also serves as an investment. Endowment plans and saving plans generally yield positive returns. ULIPs, on the other hand, are market linked and may yield a positive or negative return. A circular issued by the Department clarifies that any loss from ULIP must be reduced from the total taxable income.
On considering all aspects surrounding the taxable effect of life insurance policy, we can conclude that the amount exempt under section 10(10D) will not be subject to TDS. Any negative return will be reduced from the total taxable income. Any positive return over Rs. 100,000 and not exempt under section 10(10D) will be included in the total income. It will also be subject to tax deductible at source. It is important to note that your total tax liability must be considered after giving credit to TDS deducted under section 194DA.
This concept can be better explained by an example, as given below.
The amount received at maturity is Rs. 240,000. A cumulative insurance premium paid is Rs. 200,000. Thus, this amount will not be exempt under section 10(10D).
Further, we calculate income from a life insurance policy. This would be Rs. 40,000.
Assuming the tax rate is 30%, the tax payable will be Rs. 12,000.
TDS, which will be deducted by the insurer, will be 2% of 240,000, i.e., Rs. 4,800.
(Since maturity proceeds are higher than Rs. 100,000. It is assumed that insured has provided a valid PAN)
Thus, further tax payable will be Rs. 7,200.
(Rebates, relief, and taxes are not considered)
Suppose, if the amount received on maturity was Rs. 180,000.
In this case, the amount received is not exempt under section 10(10D). Hence, the insurer will deduct tax.
TDS deducted will be 2% of Rs. 180,000 i.e. Rs. 3,600.
However, in this case, the insured has suffered a loss of Rs. 20,000. And hence the TDS deducted by the insurer can be claimed as a refund.
Alternatively, it can also be claimed as a deduction from total tax payable by the insured depending upon the nature and sources of other incomes, which form part of the total income of the assessee.
Overall. The taxability of a life insurance policy needs to be understood thoroughly. The insurance council of India has introduced an awareness campaign saying ‘Sabse Pehle Life Insurance’, which means life insurance must be on priority, which helps you in both ways- securing your loved ones’ financial future and manage your annual taxation.