Tax on Life Insurance

tax on life insurance
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Last updated on July 30th, 2022 at 08:36 pm

Life Insurance Policy

The popularity of life insurance in India dates back to 1956. From its inception only, policies of life insurance gained momentum certainly for the life cover but another major factor that played the role was the taxation benefits (EEE category) attached to it.

The general understanding or perception of the proceeds received from the life insurance policy is that they are not taxable/or are exempt from tax as that was the case from its inception. But with the amendments made in provisions in Union Budget 2014, certain proceeds from life insurance were brought under the tax ambit. As well as a new section for deduction of tax i.e 194DA was introduced.

Section 80C: Deduction under Chapter VI-A

Deduction under section 80C can be claimed for the premium paid for a life insurance policy that was taken from the insurance company which is approved by the IRDAI. The maximum deduction u/s 80C allowable is Rs 1.5 lakhs.

 

Section 194DA – Payment in respect of life insurance policy

Section 194DA was inserted in Union Budget 2014.

Provision was made effective from 1st October 2014.

What is the TDS rate u/s 194DA? | When TDS shall be deducted from the proceeds of the life insurance policy?  

TDS @ 5% shall be deducted from the proceeds if the taxable proceeds of the life insurance policy exceed Rs 1 lakh.

The tax shall be levied/deducted on proceeds from life insurance policy only when the proceeds are not exempt u/s 10(10D).

Note: As per the provisions of section 206AA –  TDS @ 20% shall be deducted if a valid  PAN has not been furnished by the policyholder before the payment is made under the life insurance policy.

Note: Taxable proceeds of the life insurance policy shall include the sum for a life insurance policy, bonus, and any other amount payable under the policy.

 

Who will deduct the TDS u/s 194DA?

The life insurance company approved by the IRDAI will deduct the TDS u/s 194DA and deposit the same with Government. Form 26Q will be filed by the insurance company and the TDS certificate shall be issued in Form 16A.

 

What are the types of proceeds of a Life Insurance Policy?

  • Upon the death/demise of the policyholder
  • Upon the maturity of the policy term
  • Upon surrender before the expiry of the policy term

 

When the proceeds of a life insurance policy will be exempt? [Section 10(10D)] | When TDS u/s 194DA will not be deducted from proceeds from the life insurance policy?

Proceeds of a life insurance policy are exempt u/s 10(10D) of the Income Tax Act,1961 when

  • Proceeds are received by the nominee of the policyholder upon the death of the policyholder.
  • Proceeds upon maturity of the term of the life insurance policy issued on or before 31st March 2003.
  • Proceeds upon surrender before the expiry of the term of the life insurance policy issued on or before 31st March 2003.

Will TDS be deducted from the proceeds upon the death /demise of the policyholder?

No TDS us/ 194DA will not be deducted. Proceeds shall not be taxable as income from “other sources”.

As per section 10(10D), proceeds of the life insurance policy received upon the death of the policyholder by the nominee will be exempt from tax.

 

Will TDS be deducted from the proceeds upon the maturity of the policy term? | Will TDS be deducted from the proceeds upon the surrender before the expiry/maturity of the policy term? | When are the proceeds of a life insurance policy taxable? 

 

If the policy was issued on or before 31st March 2003

then proceeds from the life insurance policy will be

Exempt u/s 10(10D).

TDS will not be deducted.

Not taxable as income from “other sources”.

If the policy was issued on or after 1st April 2003 but before 31st March 2012

then proceeds from the life insurance policy will be

If the annual premium is up to 20% of the sum insured

Exempt u/s 10(10D).

TDS will not be deducted.

Not taxable as income from “other sources”.

If the annual premium is more than 20% of the sum insured

Not exempt u/s 10(10D).

TDS will be deducted.

Taxable as income from “other sources”.

If the policy is issued on or after 1st April 2012

then proceeds from the life insurance policy will be

If the annual premium is up to 10% of the sum insured

Exempt u/s 10(10D).

TDS will not be deducted.

Not taxable as income from “other sources”.

If the annual premium is more than 10% of the sum insured

Not exempt u/s 10(10D).

TDS will be deducted.

Taxable as income from “other sources”.

If the policy is issued on or after 1st April 2013

then proceeds from the life insurance policy will be

Special provision for the person with severe disability u/s 80U or specified diseases u/s 80DDB

If the annual premium is up to 15% of the sum insured

Exempt u/s 10(10D).

TDS will not be deducted.

Not taxable as income from “other sources”.

If the annual premium is more than 15% of the sum insured

Not exempt u/s 10(10D).

TDS will be deducted.

Taxable as income from “other sources”.

 

SFT Reporting on Life Insurance

Insurance Companies are reporting entities under section 285BA.

  • The payment as a life insurance premium will be reported in Form 60 or Form 61 by the Insurance Company.
  • Details of proceeds of life insurance will be reflected in AIS as it is possible that TDS u/s 194DA is deducted and will be reported in Form 26Q by the Insurance Company.

GST  on Life Insurance

GST @ 18% shall be levied on premiums of life insurance. This has resulted in a sudden increase in premiums for the policyholders.

 



 

 

Disclaimer: The above content is for general information purpose only and does not constitute professional advice. The author/ website will not be liable for any false, inaccurate, incomplete information. Any reliance you place on above content is therefore strictly at your risk.

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About CA Ankita Khetan 196 Articles
Ankita is a Chartered Accountant in practice and holds a Diploma in IFRS (from ACCA, UK). She is also a Commerce PG and Certified Independent Director (from IICA). She holds a certification in Forex and Treasury Management. Her area of expertise is GST and Income tax. She is passionate about reading, writing, and sharing knowledge on areas related to finance and taxation.

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