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Business News/ Money / Calculators/  DYK: Tax deducted at source to apply to life insurance also
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DYK: Tax deducted at source to apply to life insurance also

No TDS is applicable for maturity proceeds of less than `1 lakh.

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The insurance sector cheered the big announcement of increasing the foreign direct investment cap from 26% to 49% made in the Union budget. But there was one other tiny change proposed in the Finance Bill 2014 that will be applicable to life insurance policies. The Bill introduced a new section called 194DA which calls for tax deduction at source (TDS) for insurance plans that are taxable. Let us start by understanding when does a life insurance policy actually become taxable.

Paying tax on your life insurance policy

Under section 80C of the Income-tax Act, premium paid towards a life insurance policy qualifies for a tax deduction of up to 1.5 lakh now, but if the amount of premium paid in a financial year for a policy is in excess of 10% of the sum assured, then tax deduction is allowed only on the premium amount up to 10% of the sum assured. In other words, an annual premium of 10,000 should buy you a sum assured of at least 1 lakh. But if it buys you a sum assured of, say 80,000, then only 8,000 (10% of 80,000) will qualify for a deduction under 80C.

As for the benefits, according to section 10 (10D), death benefit in an insurance policy is tax-free, but any other benefit, such as maturity proceeds, is tax-free only if the premium is not more than 10% of the sum assured. So an annual premium of 10,000 should buy you a sum assured of at least 1 lakh. Anything less than that and you pay tax at the marginal rate on your maturity proceeds.

Earlier the premium limit for tax benefits was kept at 20% of the sum assured, but in order to increase the insurance element, the Finance Bill 2012 changed this limit to 10%. So the sum assured limit was changed from a minimum of five times the annual premium to 10 times. This change doesn’t affect policyholders who buy term plans since the sum assured in a term plan is several times the premium, but for insurance-cum-investment plans such as unit-linked insurance plans or traditional plans, increasing the insurance limit becomes important.

For those below 45 years of age, insurance plans now offer a minimum sum assured of 10 times the annual premium, but if you are above 45 years you may get a sum assured of seven times the annual premium. Even in case of single premium plans, the sum assured may be less than 10 times the premium.

The change proposed

Even as the changes made it mandatory for policyholders with less premium to insurance ratio to pay income tax, it wasn’t being reported. So in order to track such policies, the Finance Bill 2014 has announced TDS on policies where the maturity proceeds are taxable from 1 October 2014. So for policies that are taxable, the insurer will deduct tax at source of 2% and the remaining will have to be paid by the policyholder. This move comes primarily to ensure that the government is able to trace policyholders who need to pay tax on their policies. However no TDS is applicable for maturity proceeds of less than 1 lakh.

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Published: 22 Jul 2014, 07:23 PM IST
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