Have you ever heard of anyone paying TDS on maturity of Life Insurance policy? You can ask this question to your friends or colleagues and see if someone makes fun of you. Do you know Section 194DA of Income Tax Act?
People may call you crazy since it seems impossible that someone would be taxed when their life insurance policy reaches its maturity.
My friend Shankar had received a lump sum of Rs. 100,000 from the maturity of insurance policy. He had approached the bank few days back to check the amount that he was entitled to receive after maturity and it showed a sum of Rs. 102,000. However, the cheque that he received in hand was for Rs. 100,000. Where did the remaining 2000 rupees go?
He called up his advisor and the conversation that followed was as follows –
Shankar – Ajay (agent), where did my 2000 rupees disappear? Last time I had checked, the total amount payable on maturity was Rs. 102,000
Ajay – Sir, that amount did not disappear. It was in fact deducted as TDS on maturity
Shankar – TDS on maturity of Insurance Policy? That sounds strange. This is the first time I am hearing of TDS on maturity of an insurance policy.
Ajay – Sir, let me explain this to you. As per the income tax guidelines, the investments made in life insurance policies are eligible for rebate on payment of income tax up to the overall limit of Rs. 150,000.
TDS on Maturity of Life Insurance Policy
However, most people think that there is no need to pay income tax on the maturity of an insurance policy. However, TDS is deducted at 2% on the maturity of claims in case of policies where PAN number of the policyholder is available. In cases where the policyholder has not provided PAN number for their investments, TDS is deducted at the rate of 20% as per Section 194DA of the Income Tax Act.
Shankar – What is section 194 DA of Income Tax Act all about?
Ajay – Sir, before I explain section 194DA of Income Tax Act, let’s also try to understand Section 10(10) of the Income Tax Act
Deduction of TDS as per Section 10(10)D:
TDS will not be deducted from the death claim amount payable on account of any life insurance policy. This is on account of the fact that death claim amount payable to the nominee is entirely free from payment of tax.
The following insurance policies are free from any income tax deduction as per Section 10(10) D of Income tax Act 1961 on their maturity.
- Policies issued on or before 31st March’12, where the sum assured is at least five times of the annual premium paid for the policy.
- Policies issued on or after 1st April’12, where the sum assured is at least ten times of the annual premium paid for the policy.
Except for the above mentioned scenarios, all other maturity claims are taxable.
Deduction of TDS on Maturity as per Section 194DA:
A new section 194DA was introduced in the finance bill of 2014 and was added in the Income Tax Act of 1961 with the following guidelines:
- As per section 194DA, TDS is deducted at 2% of the maturity claims payable to the policyholder if the PAN details are available
- As per section 194DA, if the PAN Details are not available, TDS is deducted at 20% of the maturity claims payable to the policyholder
- TDS is applicable for claims where the maturity amount is Rs. 1 lakh and above.
What are the important checkpoints for TDS on Maturity
- Majority of the insurance policies are long duration policies and such policies are eligible for full maturity claims since the sum assured will be more than ten times of the annual premium paid for the policy as per Section 10(10).
- Policies having single premium mode sometimes loses the benefit. For example, Mr. Karan purchases a life policy having sum assured for Rs. 125,000 and he pays a single premium for Rs. 100,000. In this case the maturity amount is taxable as per Section 10(10) since the sum assured is less than ten times of the annual premium paid for the policy.
Tax Calculation on Maturity Claims
- When it comes to deduction of 2% TDS on the maturity claims as per Section 194DA, the policyholder has to include the maturity amount to the total income and has to calculate the difference amount of tax payable as per the applicable slab.
- When the policyholder happens to be in 30% slab, he has to include the maturity amount to the total income and pay 28% additional tax for the maturity claims.
- In order to avoid payment of tax on the maturity claims, the policyholder should be careful at the time of purchasing the policy and he should ensure that the sum assured is more than ten times of the annual premium paid for the policy.
TDS on Maturity Claims of NRIs – Section 195 of Income Tax Act?
- If the policy is exempt under Section 10(10)D, no tax will be deducted
- If the policy is non exempt from Section 10(10)D, tax will be deducted at source under section 195 of Income Tax Act.
- Tax will not be deducted for countries where Double Taxation Avoidance Agreement (DTAA) benefit is available.
TDS Rates for NRIs
These TDS rates apply for maturity of pension policy also.
|Taxable value is <=`1 crore||30.900%|
|Taxable value > 1 crore||35.535%|
Shankar, since you had taken a single premium policy and your maturity amount was more than Rs. 100,000 there was a TDS deduction applied on maturity and you had to pay tax based on your Income Tax slab.
Shankar – Oh! That seems logical. Thank you Ajay for explaining this in detail. Now I understand why there was a difference of Rs. 2000 in my final payment. It was deducted as TDS on maturity of my life insurance policy.