The Union Budget 2019 has amended the TDS (tax deduction at source) provisions on maturity proceeds of life insurance policies. The TDS on insurance payments would be charged at 5% of the income of the recipient as against 1% on the entire maturity proceeds. This amendment is applicable for payments made on or after 1 September 2019.
A benefit to the taxpayer:
The TDS provisions are applicable for insurance payments made for policies taken after 1 April 2012 where insurance premium exceeds 10% of the sum assured. In the case of policies taken from 1 April 2003 to 31 March 2012, TDS applies where insurance premium exceeds 20% of the sum assured.
The entire maturity proceeds are not taxable in the hands of the taxpayer. The taxpayer is liable for tax only on the net maturity proceeds arrived at after reducing the aggregate of the premiums paid over the term of the policy.
Example: A life insurance policy is bought on 5 September 2014 with a maturity term of five years. The annual premiums paid are Rs 25,000 for five years (aggregate premiums Rs 1,25,000). The maturity value or sum assured is Rs 2,00,000.
The threshold limit of 10% of the sum assured amounts to Rs 20,000. Hence, the annual premium paid is in excess of 10% of the sum assured. Consequently, the receipts are taxable. Further, since the aggregate payment of Rs 2 lakh exceeds the threshold of Rs 1 lakh, the payments are liable to TDS under Section 194DA.
In view of the amendment to TDS provisions referred above, the payment of Rs 2 lakh due on 5 September 2019 would suffer TDS on the ‘income portion’ only. Consequently, TDS would be Rs (2,00,000-1,25,000) = 75,000*5% = Rs 3,750.
The taxpayer would be liable to tax on the ‘income portion’ of Rs 75,000 in the income tax return filing for FY 2019-20 (AY 2020-21). The taxpayer will be liable for tax at the individual slab rates.
Further, the taxpayer can claim credit for TDS of Rs 3,750 against the tax payable on the aggregate taxable income. In case of a taxpayer falling under the lowest slab of 5%, the tax effect of the income would be ‘nil’.
Impact on insurance payments:
After the amendment to the TDS provisions under Section 194DA, the effective tax out-go or TDS would increase. In the example considered above, prior to the amendment, the TDS would be Rs 2,000 (2,00,000*1%). After the amendment, the TDS would be Rs 3,750.
The outgo of TDS of Rs 3,750 on the total maturity proceeds works out to be 1.87% (3,750/2,00,000). Under the earlier provisions, the TDS outgo of Rs 2,000 was at 1% of the maturity proceeds. Thus, the net tax outgo would be high.
Similarly, in the case of single premium policies where the premium paid is generally more than 10% of the sum assured, the maturity proceeds would be liable to TDS for payments of Rs 1 lakh and above.
However, in the case of term insurance plans as well as regular premium endowment plans, the maturity amount is generally tax-exempt under Section 10(10D) due to low premiums. Similarly, insurance payments made in respect of death claims are tax-exempt under Section 10(10D).
I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.