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Section 194DA TDS on Sum received under life insurance policy

News & Blog

Section 194DA TDS on Sum received under the life insurance policy

Insurance policies have become a source of investment for a large part of the population in India, as it assures future security to the policyholder. Many people invest in policy thinking to get a substantial amount on its maturity that may prove helpful in advanced years. Many people invest in life insurance policies to secure the future of the family in case of death of the policyholder. In recent years the policymakers have also designed policies with health benefits that aim at reducing medical bills. Many believe that by investing in an insurance policy will cause a reduction in income tax.

Insurance policies are believed to be tax-free. However, this is not strictly true. There are various conditions attached to an insurance policy for it to be free. Therefore as a consumer, it is our responsibility to be aware of those conditions before signing up for any insurance policy.

Section 194DA

As per Section 194DA of the Income Tax Act, if a person pays any amount to a resident as per a life insurance policy that does not fall in the category of Section 10(10D) then that person has to deduct TDS. The deducted TDS should be 1% of the amount when it is paid. However, TDS will only be deducted if the amount is more than Rs 1 lakh.

Section 10(10D) prescribes the exemptions from TDS allocated on the sum received via insurance policy as well as the bonus applied to such policies. The exemptions are as follows;

  1. If the payable premium for any fiscal year is not more than 10% of the actual amount assured to be issued in policy on or after 1st April 2012.
  2. If the payable premium for any fiscal year is not more than 20% of the actual amount assured to be issued in a policy before 31st March 2012 but on or after 1st April 2012.
  3. If the payable premium for any fiscal year is not more than 15% of the actual amount assured to be issued in policy on or after 1st April 2013 and on the life of someone who;
    • Has any disability severe or small ass mentioned in Section 80U or
    • Is suffering from ailment or disease as mentioned in Section 80DDB
  1. If the policyholder dies and a sum is issued on his death.

Amendment 194DA

The deducted TDS from the Gross amount has raised many concerns. Certain difficulties were observed for the assessee as well as Income Tax department who finds deducting TDS from the Net income (total sum received), far more preferable. This helps in automatically matching the return of income filed to the TDS return of the assessee. Therefore tax deduction at source is proposed where 5% of the tax will be deducted from the assessee’s income component.

The 194DA is amended in such a way that instead of the total payment amount the TDS liability will only be charged on income involved in payment amount with an increase of 5% rather than of 1% rate. It is important to note that the threshold limit is based on “amount of Such payment if not less than 1 lakh” and not “income component” as no change in the Provision has been made yet.

 Life insurance policy and TDS

According to the Income Tax Act, 1961 under Section 194DA any amount received by the life insurance policyholder is liable of TDS of 2% unless the insurance policy has been exempted as per Section 10(10D). Also, if the amount received by the insurance holder is not more than 1 lakh then no TDS will be applied. However, the amount will be fully taxable and credit for the Deducted TDS can be claimed in Income Tax Return.  At the same time, if the amount received does not fall in the category of Section 10(10D) and is more than 1 lakh then TDS will be deducted from it as well as on the bonus incurred on the policy.

TDS as per Section 80C

If the insured has paid a premium to ensure his own life or that of any member of the family then that premium is eligible for deduction as per Section 80C of the Income Tax Act, 1961. It does not exempt any major, minor, independent or dependent, unmarried or married. This deduction can be claimed both by an individual or an HUF as per Section 80C.

This deduction, as per Section 80C, is applicable to all life cover insurance premiums paid towards any insurer that has been approved by the Insurance Regulatory and Development Authority of India (IRDAI). Therefore, the taxpayers should not think it to be available for LIC only and can freely invest with other insurers.

To claim the deduction as per Section 80C the payable premium should not exceed 10% of the assured amount issued in policy on or after 1st April 2012. For those policies that have been issued before the 1st April 2012, the deduction can be claimed on the premium that does not exceed 20% of the assured amount issued. Another important factor to note here is that a life covering policy of an individual that was issued after 1st April 2013, and if the same individual has a disease mentioned in Section 80DDB or a disability mentioned in Section 80 U then the claim on deduction, as per Section 80C, can be obtained only if the amount of premium is less than 15% of the assured amount.

The “sum Assured” excludes any bonus to be paid on the policy and premium that would be returned.

Jeevan Anand and Section 80C

As per Section 80C, in the Jeevan Anand policy, the deductions on the premium paid on the life Insurance is allowed from the taxable income every year if it is not more than 1 lakh.

The amount is received on maturity of the policy is also tax-free as per Section 10(10DD) on all conditions being fulfilled.

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