TAX DEDUCTION FROM PAYMENT OF LIFE
INSURANCE POLICY [ Sec 194DA ]
There are a lot of benefits attached to taking insurance coverage, right from securing one’s life to the tax benefits one can claim under the Income tax act. Before the introduction of sec 194DA, any income received from the insurance policy at the time of maturity was tax-free in the hands of insurer.
Section 194 DA has been inserted with effect from October 1, 2014. It provides that any person responsible for paying to a resident any sum under a life insurance policy( including bonus) shall deduct tax at the rate of 1% at the time of making payment (*Effective June 1, 2016 the TDS rate has been reduced from 2% to 1%).. However, tax is not required to be deducted at source if the amount of proceeds are less than Rs. 1, 00,000/-.
If exemption is available to the recipient under section 10(10D), then above TDS provisionsare not applicable. As per sec 10 [10(D)] of the Income Tax Act any income received from the insurance policy is exempted whether received from Indian or a Foreign Company.
IS THERE ANY TDS ON THE DEATH CLAIM FROM A LIFE INSURANCE POLICY?
No. Even after the recent changes, there is no TDS from the death claim amount of any life insurance policies. This is because the death claim amount is totally tax free in the hand of the nominee.
WHEN IS TDS UNDER SECTION 194DA NOT EXEMPT?
1. Any sum received under section 80DD and 80DDA (3).
2. Any sum received under a Keyman Insurance Policy.
3. If Policy is bought after 1st April 2003 but before 31st April 2012: the premium paid is 20% more than the sum insured.
4. If Policy is bought after 1st April 2012: the premium paid is 10% more than the sum insured.
5. Life insurance policy bought for disabled or those suffering from ailments in section 80DDB after 1st April 2013 if premiums are more than 15% of sum assured.
Let us understand the above provision with example:
Example 1:
Mr. Rohit took insurance policy on 27th June, 2012 for Rs. 2, 00,000/-.
He paid premium of Rs. 50,000/- every year.
On 26th June, 2017 he received Rs. 2, 25,000/- (including bonus) as the maturity proceeds.
State whether TDS provisions are applicable or not.
SOLUTION:
Policy is taken after 1st April, 2012. Hence, amount of deduction allowed on premium should notexceed 10% of the sum assured.
In this case, the sum assured was Rs. 2,00,000/- so amount of premium should not exceed Rs.20,000/-. However actual premium paid (Rs. 50,000/-) is more than ceiling limit (Rs. 20,000/-). Hence, the proceeds are taxable.
As per Section 194DA, since the proceeds are more than Rs. 1, 00,000/- TDS provisions are
applicable. Hence the insurance company will deduct TDS @ 1% of Rs. 2, 25,000/- i.e. Rs.2,250/- while making the payment of the maturity proceeds.
TAX DEDUCTION FROM PAYMENT OF LIFEINSURANCE POLICY
Maitri Badani (CA-Intermediate)
