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Everything You Need to Know About TDS On Life Insurance Policies

Feb 13, 2020 | 2 months ago | Read Time: 3 minutes | By iKnowledge Team
TDS on Life Insurance Policies

There are various milestones in life that we can prepare for, but it is just as important to be prepared for the unexpected. That is why life insurance policies are always highly recommended as an integral part of every individual’s financial portfolio.

The primary purpose of a life insurance policy is, of course, to provide financial coverage in the unfortunate event of the policyholder’s demise. However, this often leads to the misconception that life insurance policies are exempt from any form of tax. In particular, not many know that Tax Deducted at Source, or TDS, is always levied at the maturity of a life insurance policy.

The topic of TDS, as levied on life insurance policies, can be a tricky one. To understand it better, let us take a closer look at a few factors:

What is TDS?

Firstly, let us revisit the concept of Tax Deducted at Source, or TDS. TDS is a form of income tax whereby the relevant tax amount is deducted directly from the full amount, before the resulting income is provided to a person. TDS is typically applicable on salaries, professional fees, interests and commissions. The deducted amount is eventually deposited with the government.

TDS on Life Insurance Policies

While TDS is typically deducted on the maturity amount of a life insurance policy, it is not the same across the board. Here are the various sections and provisions that determine the exact TDS applicable on an individual’s life insurance:

Exceptions
Under Section 10(10)D of the Income Tax, 1961, certain insurance policies, be they life insurance or term insurance, are exempted from any form of income tax if:

  • The policies were issued on or before 31st March 2012, where the sum assured is at least five times the annual premium paid for the policy.

  • The policies were issued on or after 1st April 2012, where the sum assured is at least ten times the annual premium paid for the policy.

Moreover, there is another exemption under Section 80DDB, if:

  • The policies are issued on or after 1st April 2013 for those who are disabled or suffering from ailments as specified by the Income Tax Act, where the premium payable in any given year exceeds 15% of the actual sum assured.

Deducting TDS on Life Insurance

The exceptions listed above under Section 10(10D) do not apply if the maturity amount from a life insurance policy exceeds Rs. 1,00,000 in a single year. In such a case, the maturity amount will be taxable as per usual.TDS is deducted on the maturity amount of a life insurance policy as per these provisions under Section 194DA:

  • If the policyholder’s PAN details are available and registered, TDS is deducted at a rate of 1% of the maturity amount payable to the policyholder.

  • If the policyholder’s PAN details are not available and registered, TDS is deducted at a rate of 20 % of the maturity amount.

Important Points to Note

Apart from the points about TDS deductions and exceptions, there are a few finer points that are important to note:

  • It is always preferable to keep one’s life insurance policy for as long a tenure as possible. This helps safeguard your family’s financial needs and ensures that you never run out of the security of coverage. It is also recommended that the sum insured be at least 10 times the policyholder’s annual income.

    In terms of TDS, this means that your long duration life insurance policy will be eligible for full maturity claims and therefore, liable for the relevant TDS amount

  • Make sure to register for and provide your PAN card details since it considerably lowers the TDS burden on your life insurance.

  • To calculate the applicable TDS, you must include the payable maturity amount into your total income.

At the end of the day, if you fall under any of the mentioned deduction brackets, your insurance company will provide you the maturity amount after deducting the relevant TDS. As a policyholder, it is important that you revisit the exception provisions and calculate the deducted figure ahead of time to avoid any confusion.

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