TDS on Life insurance policies!

Life insurance

Life insurance policy holders may receive a communication from their insurance service providers about the tax deduction rule in effect from 1st October 2014. The new rule first announced by the finance minister Mr. Arun Jaitley during the annual budget calls for a tax deduction at source from maturity proceeds of all life insurance policies in case the total premium paid is more than 10 per cent of the sum assured is applicable from October 1 2014.

The government introduced the changes in TDS for insurance policies as per the New Finance Bill of 2014 by introducing a new section 194 DA in the income tax Act of 1961. As per the new section, tax shall be deducted at source (TDS) on payouts for all insurance policies exceeding Rs. 1 Lakhs in a financial year which are not exempted for income tax under section 10(10D). While many people have left with a bitter taste as they took life insurance policy considering the fact that it would not warrant for any tax deductions, financial analysts and tax experts believe this is a step in the right direction as income tax payers were evading tax liable on their insurance policies. Let us take a look at the introduction of TDS deduction on insurance policies and its impact on the common man.

Current insurance tax laws: As per the current life insurance and taxation laws, all life insurance policies are affected directly by two distinct sections of the income tax act namely Section 80C and Section 10(10)D. Under Section 80C, an insurance policy holder can seek tax deduction on the premium paid in the last financial year up to a maximum limit of Rs. 1.5 Lakhs. The maturity proceeds paid out to the insurance policy holder including ULIPS, traditional policies or term pans are exempted from taxable income in case the premium paid in any year is more than 10% of the total sum assured for policies bought after April 1, 2012 and 20% of the sum insured for policies bought between April 1 2003 and 31st March 2012.

Introduction of Section 194 DA: In case if the above conditions not being met or the policy holder had a policy not included under the ambit of the above mentioned sections, the onus to disclose the type of policy and pay its designated tax was with the policyholder. Since a large number of people were evading payment of tax unknowingly and knowingly, the government decided to introduce a new rule that would deduct tax at source for all insurance policies.

As per the new section 194DS introduced in the new finance bill of 2014, tax would deducted at source (TDS) on payouts to Resident Indian insurance policy holders in case their cumulative payout across all policies which are not exempt under section 10(10D) equals or exceeds Rs. 1 Lakhs in one financial year.

Insurance policies likely to come under the ambit of new TDS Deduction Law: All insurance policies including ULIPs, term insurance plans and traditional insurance policies except annuity, pension plans, insurance policy for a disabled dependent and employer sponsored group life insurance are likely to come under the ambit of the new TDS rule as per the new finance bill of 2014. Most single premium policies are likely to come under the TDS deduction rule unless they offer single premium to the tune of 10 times the premium as total sum assured. In other words all life insurance policies that are not eligible for tax exemption under Section 10 (10D), will see 2 per cent tax deducted at source on the sum paid to the policyholder.

Quantum of TDS deduction:  As per the new finance bill of 2014, section 194DA of the income tax Act of 1961 would deduct a total of 2 percent tax at source on the total sum to be paid to the policyholder with a valid and registered PAN number. In case the policyholder does not have a valid PAN which is registered, a total of 20% tax would be deducted at source. All those insurance policy holders who do not have their PAN numbers registered with their insurance service providers need to get their PAN numbers registered to avoid deduction of 20% tax deduction as TDS.