There are many milestones which you should be prepared in life, most important of it is getting prepared for unexpected situations. Life insurance policies are an essential part of an individual’s financial portfolio for avoiding unavoidable circumstances.
The chief purpose of a life insurance policy is for providing financial coverage for your loved ones when there is an unfortunate situation in your life. People often think that life insurance policy is exempt from any tax form. The TDS will be calculated only when the life insurance attains its maturity.
Here are the close factors which you should know about TDS on a life insurance policy:
TDS – Definition:
TDS (Tax Deducted at Source) is an income tax form where the appropriate tax amount will be directly deducted from the total amount before the final income is provided to an individual. Mostly TDS will be applicable on professional charges, commissions, salaries and interests on your investment. The deducted amount from the individual will be deposited to the government.
TDS on Life Insurance Policies:
Usually, TDS is calculated on the maturity amount of a life insurance policy, but it’s not the same everywhere. Here are different sections and provisions which will determine the accurate TDS applicable on a person’s life insurance policies:
There are specific insurance policies that are exempted from any income tax deduction as per Section 10(10) D of the Income Tax Act of 1961, which takes place at the life insurance maturity.
- When considering the policies that are issued on or before the 31st of March, it varies. Under that scenario in which the sum assured is at least five times the annual premium that you have paid towards the policy.
- When considering policies that are issued on or after the 1st of April, it will be different. So then the sum assured is at least ten times the annual premium you have paid towards the policy.
Other the scenarios mentioned above, all the maturity claims will be considered taxable.
Also, there is another exemption under Section 80DDB, when:
The policy which is issued on or after April physically abled or suffering from ailments as specified in the Indian Income Tax Act, that total premium paid for the current year exceeds 15% of the actual sum assured on that policy.
When coming to Section 194DA, here are the deduction of TDS at maturity:
- As per Section 194DA, TDS deducted at 1% of the maturity claims payable to the policyholder when they provide PAN card details.
- When PAN card details are not available, then under Section 194DA, TDS deducted at 20% of the maturity claims payable to the policyholder.
- TDS will be applicable for all claims which have a maturity amount of Rs.1 lakh and above.
Deducting TDS on Life Insurance:
The exceptions mentioned above under Section 10(10)D are not applicable when the maturity amount of the life insurance exceeds Rs.1 lakh per year. When in such case, the maturity amount will be considered taxable.
TDS which is deducted on the maturity amount of a life insurance policy as per the laws under Section 194DA:
- When the policyholder’s PAN card details are available and registered, then the TDS will be deducted. It will be deducted at a rate of 1% of the maturity amount payable to the policyholder.
- When the policyholder’s PAN card details are not available and registered, then the TDS will be deducted. It will be deducted at a rate of 20% of the maturity amount payable to the policyholder.
Critical Checkpoints For TDS On Maturity:
- Most life insurance policies will have long duration policies and such are eligible for full maturity at claims as the sum assured will be more than ten times the amount of annual premium the policyholder would have paid as per Section 10(10) D.
- Also, policies with a single premium mode will sometimes miss the benefit as well.
Calculating Tax On Maturity Claims:
- Under Section 194DA, a deduction of 1% TDS on the maturity claims the policyholder should include the maturity amount to their total income. The policyholder should calculate the difference amount of tax payable as per their applicable tax slab.
- When the policyholder comes under the 30% tax slab, then the individual should include the maturity amount to their total income and should pay 28% additional tax for claiming the maturity amount.
- When you want to avoid paying tax on your maturity claims, then you should be careful at the time of policy purchase and should ensure that the sum assured is more than ten times the annual premium you pay towards the policy.
Maturity Claims TDS For NRIs:
- As per the TDS rate under Section 195 of the Indian Income Tax Act:
- When the policy is exempt under Section 10(10)D, there will not be any tax deduction.
- But when the policy is non-exempt under Section 10(10) D, there will TDS under Section 195 of the Indian Income Tax Act.
- In countries where the Double Taxation Avoidance Agreement (DTAA) benefit is available, then there won’t be any tax deduction.
Important Points To Note On TDS On Life Insurance Policy:
Apart from TDS deductions and exceptions, there are few more things which are essential for you to know:
- When you are searching for a life insurance policy, you should choose a longer tenure one, when you select like that. It will help in safeguarding your families financial requirements and should be sure that you never run out of your security coverage. It is also necessary to make sure that the sum assured is at least ten times your annual income.
- In terms of TDS, your long-duration life insurance policy will be eligible for full maturity claims, so you are liable to the relevant TDS amount.
- When you make sure to register and provide the PAN card details, you can considerably lower the TDS burdens on your life insurance policy.
- For calculating the applicable TDS, you need to pay the maturity amount into your total income.
When you fall under any of the deduction mentioned above brackets, your insurance company will make sure to provide you with the maturity amount after deducting the relevant TDS. As a policyholder, you should revisit the exception provisions and make sure to calculate the deducted amount ahead for avoiding confusion.