Life insurance policies are one of the most popular choices for tax savings in India. Under Section 80C, taxpayers in India can save up to Rs 1.50 lakh in a year against premiums paid to life insurance companies. However, the gain made through such policies have tax implications.
Even though life insurance policies offer you the much-desired safety and monetary assurance, monetary profits gained through these policies are taxable under the Income Tax (I-T) laws in India. In this context, we would discuss Section 194DA and its implications on your life insurance maturity pay-out.
See also: How to save income tax?
What is Section 194DA?
Under Section 194DA of the (I-T) Act, 1961, insurance companies in India have been made liable to deduct tax at source in case of life insurance policy maturity payment. This means any payment made to insurance policy holders by the company is taxable at the time of payment. TDS is also deducted on the bonus payment.
“Any person responsible for paying to a resident any sum under a life insurance policy, including the sum allocated by way of bonus on such policy, other than the amount not includible in the total income under (Section10D), shall, at the time of payment thereof, deduct income tax thereon at the rate of 5% on the amount of income comprised therein,” reads the section.
Learn about: section 10 10d
As mentioned in the text, no TDS under this section is deducted if the life insurance policy comes under Section 10(10D). Maturity amounts that fall under this section include:
- Annuity pay-out
- Pension plan pay-out
- Death pay-out
- Benefit not for a policy issued under Section 80DD (3)
- Pay-out not available under the Keyman Insurance Policy
- Pay-out is not received under an employer-sponsored group insurance scheme
- Premium paid during any year must not exceed 20% of the sum assured for policies purchased between April 1, 2003, and April 30, 2012
- If the policy is purchased after April 30, 2012, the premium amount should not be more than 10% of the sum assured
- Insurance premium payable in any year should not exceed 15% of the sum assured for the policy. It must be purchased on, or after April 1, 2013. The insurance must be for the life of any person who is:
- With a disability, or severe disability as per Section 80U.
- Has any disease, or ailment as specified in the rules under Section 80DDB.
Know that the maturity amount received through a single premium insurance policy is taxable, and not exempted under Section 10(10D). In this case, the maturity amount will be tax-free only if the minimum sum assured is 10 times the single premium amount paid for the policy’s tenure.
Note, no TDS will be deducted if the taxpayer’s total income is below the basic exemption limit and they submit Form 15G/Form 15H to prove it.
A commissioned employee is qualified for reduced, or NIL TDS under Section 197.
see also about: 206cr of income tax act
Deduction under Section 194DA is made only if the payment in a financial year is more than Rs 1 Lakh. On any payment less than that, no TDS is applicable.
all about: Section 194D.
The insurer will deduct 5% TDS from what is perceived as the income part of your insurance policy payment. In case you don’t have a PAN, the TDS imposed would be 20%.
know about: section 194o of income tax act
TDS rate under Section 194DA
|Life insurance maturity payment type||TDS rate|
|Life insurance companies||5%|
|Other Indian companies||10%|
|Where a taxpayer does not submit PAN details||20%|
The government has made changes to Section 194DA concerning the deduction of Tax Deducted at Source (TDS) on taxable life insurance maturity proceeds. As per the amendment, the deductor is now required to deduct TDS at a higher rate of 5% instead of the previous rate of 1%. This applies to the sum received through life insurance policies that do not fall under the exemption provided by Section 10(10D). The taxable amount includes the maturity proceeds and any bonuses received from the insurance policy.
Under the revised Section 194DA, there are certain exemptions to the TDS deduction. TDS will not be applicable in two scenarios:
- If the sum payment received is less than Rs 1 lakh.
- If the sum is received on the death of the insured person.
In these cases, the deductor will not be required to deduct any TDS on the life insurance maturity proceeds or bonuses.
What is TDS?
TDS is tax deducted at the time of generating income to curb tax evasion.
Which life insurance premium is tax deductible?
Any amount paid to life insurance premium for yourself, your spouse and children qualify for deduction under Section 80C. However, this is not true for premium paid by you for parents, siblings, or in-laws.
Is TDS deducted for every life insurance maturity payment?
No, if the amount received is less than Rs 1 Lakh, no TDS is deducted on the life insurance maturity payment.
What are Form 15G and Form 15H?
Form 15G and Form 15H are self-declarations submitted to banks, or any other entity, stating that the income is within the tax exemption limit and the bank should not deduct TDS on the interest earned on deposits or investments.