TAXATION ON MATURITY OF INSURANCE POLICY
Many people buy insurance policies just to save on taxes. But this is not advisable as the real purpose of insurance is to secure your dependents financially.
The tax benefits, which are often the most-discussed aspect of insurance policies, are actually a positive side to those policies and not the main benefit. And since an insurance policy is an important aspect of our financial lives and those of our dependents, it is important to understand all the aspects of it. So, we should not focus only on tax benefits available under Section 80C, but we should also focus on how the maturity amount is taxed later under Section 10(10D).
Section 10(10D) of Income Tax Act, 1961
The amount of sum assured and any bonus i.e. the policy proceeds paid on maturity or surrender of policy or on the death of the insured are completely tax-free for the recipient subject to certain conditions. These policy proceeds will be taxable in the hands of the insured in the following situations:
- In case of an insurance policy issued after 1.4.2003 but on or before 31.3.2012
If the premium payable in any year exceeds 20% of the actual sum assured, then the
policy proceeds would be taxable in the hands of the insured. - For policies issued on or after 1.4.2012
If the premium payable in any year exceeds 10% of the actual sum assured, then the policy proceeds would be taxable in the hands of the insured. - In case the insured suffers from severe disability or disease as specified by the Income Tax Act and Rules and his/her policy was issued on or after 1.4.2013
For these types of persons, the limit of 10% will be increased to 15% i.e. If the premium payable in any year exceeds 15% of the actual sum assured, then the policy proceeds would be taxable in the hands of the insured. For this purpose, disability has to be one of those specified in section 80U and disease has to be one of those specified in section 80DDB read with Rule 11DD of Income Tax Rules.
In case the premium payable in any year exceeds the limit i.e. 10%, 15% or 20% of the actual sum assured, as described above, then the whole proceeds from the insurance policy would be taxable in the year of receipt. However, in case of death of the insured, where his nominee(s) receive the policy proceeds the same shall be tax-free in the hands of the nominee(s) even if the premium paid in any year crosses the prescribed percentage of the sum assured.
TDS applicable to the payment of life insurance policy proceeds
According to Section 194DA of the Income Tax Act, 1961, any sum received by an insured Indian resident from an insurer under a life insurance policy shall be subject to TDS @ 1% if the said sum is not exempted under section 10(10D). This means that policy proceeds exempted under section 10(10D) will be given to the insured without TDS. Further, even if these proceeds are taxable as per section 10(10D) but do not exceed ₹ 100,000 then also no TDS is to be deducted by the insurer when making the payment to the insured. However, one needs to carefully note that the ₹ 1 Lakh limit is for TDS u/s 194DA & not for Section 10(10D). It is important that you have to submit the PAN to your insurer or else the rate of TDS would be 20% instead of 1% in cases where TDS is applicable.
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There has been an amendment in Section 194DA in the Union Budget 2019. From 1 st September 2019, the TDS is deducted on the differential amount and not on the entire proceeds of the insurance policy at a rate of 5% instead of the earlier 1%. The above amendment in section 194DA has made it absolutely clear that the entire amount cannot be treated as ‘income’ and it’s only the differential amount that would be taxable as income.
Further, the tax treatment of life insurance policies bought from foreign insurers (those not registered in India) may involve additional conditions which would vary from case to case.
