TDS done on Gross amount received from Life Insurance Companies- Whether entire amount is taxable or only the income therin is taxable?

TDS done on Gross amount received from Life Insurance Companies- Whether entire amount is taxable or only the income therin is taxable?

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TDS done on Gross amount received from Life Insurance Companies- Whether entire amount is taxable or only the income therin is taxable?

  
Section 10(10D) provides that the assessee is not entitled to benefit u/s. 10(10D) of the Income Tax Act if the assessee’s premium payable exceeds 10% of the actual capital sum assured.
It means that the amount is taxable at the time of its receipt. Section 10(10D) is further backed by section 194D which provides that the payer (life insurance company) shall be liable to deduct tax at source (TDS) at the rate of one (1%) on the entire amount and not only on the profit element. This is contemplated by section 194DA.
The question arises whether the income element received only is taxable or the entire amount is taxable?
This was the issue before the Kolkata ITAT in the case of SANDEEP MODI VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CPC- No.- I.T.A. No. 425/Kol/2021, Dated.- March 4, 2022 wherein the issue of addition of the amount received from life insurance company was challenged.
The issue was whether the premium component of the maturity of Life Insurance Policy is also taxable as Income or it is to be excluded. In this case, the LIC policy’s taken by the assessee was a one time premium policy wherein Rs. 10 Lakh premium was paid by the assessee which was almost same as the assured value of Rs. 10,88,000/-. Around Rs. 14 Lakh was received from this policy at the time of maturity.
Learned AR argued that Assessee is not entitled to benefit u/s. 10(10D) of the Act, since the assessee’s premium payable exceeds 10% of the actual capital sum assured and so the assessee could not get the benefit of chapter III. It was further argued that it is the premium amount paid by the assessee in AY 2012-13 is his investment & was paid out of the ‘tax paid’ amount.  According to assessee in effect the impugned action tantamount to double taxation.
Assessee further summarized that the confusion arises in such cases as the payer (life insurance company) deducts tax at source (TDS) of one (1%) on the entire amount as contemplated u/s. 194DA.
ITAT held as under:
  1. Under section 194DA of the Act, a person is obliged to deduct tax at source, if it pays any sum to a resident under a life insurance policy, which is not exempt under sub-section (10D) of section 10.
  2. The present requirement is to deduct at the rate of one percent of such sum at the time of payment.
  3. As a result of deducting tax on gross amount, there is a difficulties created to an assessee who otherwise has to pay tax on net income (i.e., after deducting the amount of insurance premium paid by him from the total sum received)
  4. From the point of view of tax administration as well, it is preferable to deduct tax on net income so that the income as per TDS return of the deductor can be matched automatically with the return of income filed by the assessee.
  5. The person who is paying a sum to a resident under a life insurance policy is aware of the amount of insurance premium paid by the assessee.
  6. From a reading of the aforesaid observation as well as taking note of the contention of the assessee, and taking note of the fact that assessee had neither availed any deduction under Sec 80C of the Act in respect of the premium paid to SBI nor claimed any deduction under section 10(10D) of the Act and offered ₹ 3,09,000/- for tax in his ROI, no addition was warranted.
  7. Therefore in this case only the net amount that is ₹ 3,09,000/- should have been taxed, which the assessee has already offered to tax in his ROI.
  8. Therefore,the assessee’s claim is valid and allows the claim of the assessee by directing deletion of the addition of ₹ 10 Lakhs.
  9. With above observation, the issue was decided in favour of the assessee
Taxpayer may note that the  rate of tax has now been revised u/s 194DA at 5% (3.75% for the period from 14.05.2020 to 31.03.2021) on “only Income Part” of the payment made under LIP which is Applicable from September 1, 2019]. Hence the case discussed above would be relevant in all cases where TDS is done at the rate of 1% prior to amendment in section 194DA.

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