Taxable returns from life insurance 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 01st April, 2003 and 31st April, 2012) or
- Premium paid is not more than 10% of the sum assured (Policy is bought after 31st April,2012)
As per newly introduced section 194DA, tax shall be deducted at source on any amount equal to or in excess of Rs. 100,000 paid to the insured at maturity provided such amount is not exempt under section 10(10D).
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).
Insurance policies are of various types. They can be broadly classified into endowment plans, term plans and ULIPs. With the advent for hybrid insurance products, purpose of insurance is not limited life cover alone. It also serves as an investment. Endowment plans and saving plans generally yield positive returns. ULIPs, on the other hand, is market linked and may yield a positive or a 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, we can conclude that amount exempt under section 10(10D) will not be subject to TDS. Any negative return will be reduced from total taxable income. Any positive return in excess of 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 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.
Amount received at maturity is Rs. 240,000. Cumulative insurance premium paid is Rs. 200,000. Thus, this amount will not be exempt under section 10(10D).
Further, we calculate income from insurance. This would be Rs. 40,000.
Assuming the tax rate is 30%, 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 greater 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 amount received on maturity was Rs. 180,000.
In this case, 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 assesse.