Life Insurance Maturity Amount Taxability (TDS)
Life Insurance / LIC policy maturity Amount is taxable with TDS or not? This is by and large most asked question to Insurance Funda, especially after the budget 2019. Well, the answer is, Life Insurance policy maturity amount can be exempted from tax if and only if it satisfies certain conditions. Otherwise, the policy will become taxable and TDS (Tax deducted at source) will become applicable to it.
Let us discuss the conditions and rules applicable for (deciding the taxability of) life insurance / LIC policy maturity amount in detail so that you need not worry at the time of maturity of the policy.
Is Life Insurance policy/LIC maturity amount taxable?
Taxability of maturity amount of a life insurance policy is determined by section 10(10D) of income tax act 1961. As per this section, any sum received including bonus under Life insurance policies which are not exempted under section 10(10D) of income tax act will be subject to deduction of tax at source as per the rate applicable.
Conditions/Policies where section 10(10D) exemption is not available
|No:||Period of issue of policy||Condition||Verdict|
|1||From 1/04/2003 to 31/03/2012||Premium payable for any of the years exceeds 20% of actual Capital Sum Assured||Section (10(10D) exemption not available|
|2||On and after 1/4/2012 (applicable now)||Premium payable for any of the years exceeds 10% of actual Capital Sum Assured||Section (10(10D) exemption not available|
|3||Any date of commencement of policy||Any sum received under Jeevan Aadhar Plan (114), if dependant predeceases proposer of the policy sub to section 80DD(3) of income tax act.||Section (10(10D) exemption not available|
|4||Policy issued on or after 1/04/2013||On the life of a disabled person where the premium payable is more than 15 % of the sum assured.||Section (10(10D) exemption not available|
|5||Any date of commencement||Any sum received under a Key man insurance policy.||Section (10(10D) exemption not available|
In short, if you are purchasing a new policy, make sure that the annual premium is less than 10% of the sum assured to get section 10(10D) exemption. Most of the regular premium policies will get this exemption but obviously, single premium policies will not get this benefit.
Deduction of Income Tax at source (TDS) on Insurance policy maturity amount
Tax deduction at source (TDS) from insurance policy maturity is governed by section 194 DA of the finance act 2014. As per this act, all policies where section 10(10D) exemption is not available, the maturity amount (including sum assured and bonus) will be subject to deduction of tax at source at the rate of 1 %. However, if the gross payment amount in a financial year is less than one lakh, no tax will be deducted.
Amendment of section 194 DA in the budget 2019
In the finance bill of Budget 2019, it has been mentioned as follows.
“It is proposed to amend the said section so as to provide that the levy of tax deduction at source shall be on the income comprised in the sum payable by way of redemption of a life insurance policy, including the sum allocated by way of bonus on such life insurance policy, excluding the amount exempted under the said clause (10D) of section 10 at the increased rate of five per cent.”
Which means that all policies where section 10(10D) exemption is not available, the existing rate of 1% TDS will be enhanced to 5% with effect from 1st September 2019.
How Section 194 DA applied for annuity plans.
In the case of annuity/Pension policies, risk coverage or death sum assured is not available. Such plans are not covered under section 194 DA of income tax 1961. Hence there is no need to deduct any tax at source from the policy payment.
Section 206AA of income tax act 1961 – Requirement of PAN
As per 206AA of the income tax act, 1961, if the policyholder is not having PAN or not able to submit PAN details at the time of maturity, the rate of tax to be deducted at source will be 20%.
It is also to be noted that submission of Form no 15H/G to demand ‘No tax deduction‘ or ‘deduction at an altered rate‘ will not be entertained as per special instructions.
Guidelines to determine capital sum assured for Sec 10(10D) exemption
- For policies issued from 1/4/2003 to 31/03/2012, the capital sum assured will be the death sum assured applicable. In the case of double cover or triple cover policies, the enhanced coverage will be used to calculate the exemption.
- For policies issued on or after 1/4/12012, the capital sum assured will be the minimum death sum assured available during the policy term. For example in policies where there is an increase in the coverage with time (as in Jeevan Surabhi Plan) the minimum basic sum assured only will be taken for calculating the exemption.
- The capital sum assured will not include rider benefit sum assured like critical illness rider, accident benefit, term rider, premium waiver benefit, etc.
- The capital sum assured will not include any bonus, return of premium, etc.
Guidelines to determine the premium paid for the purpose of section 10(10D)
While calculating the amount of premium payable during any of the years of the policy term, installment premium will include the premium paid for basic sum assured, any extra premium for health/build/occupation, the premium for accident benefit, term rider, critical illness rider, etc.
The premium payable under ULIP plans will also include top-up premium paid if any.
Insurance Payments where section 194 DA becomes applicable
Let us have a detailed look at which all are the payments where section 194 DA becomes applicable.
|Payments where 194 DA becomes applicable|
|SL: NO:||Inclusions (Section 194 DA becomes applicable)||Exclusions (Section 194 DA will not be applicable)|
|1.||Survival Benefit Claim||Death benefit|
|2.||Maturity Claim||Loan form policy|
|3.||Discounted value of Maturity claim||Refund of premium or policy deposit|
|4.||Installment under settlement option opted for maturity claim||Annuity or pension payment after vesting|
|5.||Payments from annuity or pension plans with risk cover.||Payments under health insurance plans|
|6.||Surrender value||Claims settled but outstanding (where tax is already deducted)|
|7||Rider benefits payments|
Anish L J is a ‘Financial Planner’ and member of Chartered Insurance Institute(CII), London and Insurance Institute of India. He is also a finance, insurance and software consultant. He thoroughly follows the developments in finance, insurance, and other related sectors.