Confused about TDS regulations on Life Insurance policies? Here’s all you need to know.
It’s a common misconception that you don’t need to pay income tax when your insurance policy matures. The actual rule is just the opposite. Actually, TDS is deducted at the rate of 1% on the maturity of claims where the PAN number of the policyholder is available.
In case the PAN details of the policyholder are not available, TDS is deducted at the rate of 20% as per Section 194DA of the Income Tax Act.
Additional Reading: Not In The Income Tax Bracket? Here’s Why You Should Still Invest
Therefore, it’s important to understand Section 194DA of the Income Tax Act. Before we go there, we need to understand TDS as per Section 10(10)D.
Guidelines Under Section 10(10)D
A crucial point to note is that there are certain insurance policies that are free from any income tax deduction as per Section 10(10) D of the Income Tax Act 1961 on their maturity.
These are:
- Policies issued on or before 31st March 2012, where the sum assured is at least five times the annual premium paid for the policy.
- Policies issued on or after 1st April 2012, where the sum assured is at least ten times the annual premium paid for the policy.
Except for the above-mentioned scenarios, all other maturity claims are taxable.
Additional Reading: What To Submit To Avoid Paying Excess TDS
Section 194DA
Coming back to Section 194DA, here’s how deduction of TDS happens on maturity:
- As per section 194DA, TDS is deducted at 1% of the maturity claims payable to the policyholder if the PAN details are available
- According to 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 all claims where the maturity amount is Rs. 1 lakh and above.
Crucial Checkpoints For TDS On Maturity
- The majority of 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 the annual premium paid for the policy as per Section 10(10).
- Policies with single premium mode may sometimes lose this benefit.
How To Calculate Tax On Maturity Claims
- As per Section 194DA, for deduction of 1% TDS on the maturity claims, the policyholder has to include the maturity amount in the total income. The policyholder also needs to calculate the difference amount of tax payable as per the applicable slab.
- If the policyholder falls in the 30% slab, he or she has to include the maturity amount in the total income and pay 28% additional tax for the maturity claims.
In order to avoid paying tax on the maturity claims, the policyholder needs to be careful at the time of purchasing the policy and should ensure that the sum assured is more than ten times the annual premium paid for the policy.
Additional Reading: Financial Advice For NRIs Returning To India
TDS On Maturity Claims For NRIs
According to the TDS rate under Section 195 of Income Tax Act for AY 2018-19:
- 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, the tax will be deducted at source under section 195 of Income Tax Act.
- Also, no tax will be deducted for countries where Double Taxation Avoidance Agreement (DTAA) benefit is available.
Got everything you needed to know about TDS on Life Insurance? It’s time to look for the right insurance plan now.