During budget 2014-15 announcement on July 10, 2014, we.f. October 1, 2014, u/s 194DA your insurer will deduct tax at source of 2% from maturity proceeds of a life insurance policy if the premium paid is more than 10% of the sum assured. It has been introduced with an intention to have a mechanism for reporting of transactions and collection of tax in respect of sum paid under life insurance policies which are not exempted under section 10(10D) of the Act.
Update: Budget 2016-17 proposed instead of 2% TDS, the rate will be at 1% w.e.f June 1, 2016
This new section 194DA has been inserted under the Act to provide for deduction of tax at the rate of 2% on sum paid under a life insurance policy, including the sum allocated by way of bonus, which are not exempt under section 10(10D) of the Act. But no deduction under this provision shall be made if the aggregate sum paid in a financial year to an assessee is less than Rs 1,oo,ooo.
For example; if you have been paying premium of Rs. 10,000 and sum assured is less than 10 times, say Rs. 99,999 or less, 2% TDS will be applicable on maturity proceeds subject to maturity pay-out is more than Rs. 1,00,000.
It has to be noted if the PAN details are not updated on the policy, TDS at 20% will be deducted.
Currently, under section 10(10D) of the Income Tax Act, any sum received from a life insurer is not taxable if the premium payable is upto 10 % of the sum assured. Tax would be payable as per your tax slab if the premium exceeded the 10 per cent amount. This is not a new thing, but tax payers have been knowingly or unknowingly avoided the payment of tax. However two of the conditions for a maturity proceeds to be exempt under section 10(10D) are:
- For policies issued between April 1, 2003 to March 31, 2012: If Premium to Sum Assured is less than or equal to 20%
- For policies issued post March 31, 2012: if Premium to Sum Assured is less than or equal to 10%
This new provision of the Act will at least ensure taxable proceeds have been reported for a better check from the IT dept and avoid tax evasion by the assessee. Of course this is going to be impacted negatively to those insured who have been sold insurance policies by their Relationship Managers, Insurance Agents saying, “no insurance or taking less insurance coverage will have lesser charges towards the
insurance net investment (they say 🙂 )”.
Update: Amendment in above provision stated that, TDS exemption is allowed policy holders who do not have income chargeable to tax from paying TDS on the proceeds of Life Insurance Policies.
To avail the exemption, policy holders needs to furnish Form 15G (non-senior citizens) or Form 15H (for senior citizens) to the Life Insurer, before the end of the financial year.