Will there be TDS from my insurance policy on maturity? What is Section 194DA?
There is lot of discussion happening over the issue of TDS from the maturity of an insurance policy under Section 194DA. As per the normal understanding, any amount received from an insurance policy is tax free. But from 1st October 2014, insurance companies started deducting TDS of 2% from some policies and if the PAN is not updated the TDS can be 20%, under Section 194DA.
Is there any TDS on the death claim from a life insurance policy?
No. Even after the recent changes, there is no TDS from the death claim amount of any life insurance policies. This is because the death claim amount is totally tax free in the hand of the nominee. So, you need not worry about that.
Will there be a tax on the maturity of my policy?
The maturity benefits from insurance policies are exempted from Income tax under Section 10(10) D of the Income Tax Act 1961. The types of policies which are exempted from Income tax are the following.
- If the policy is issued on or before 31.03. 2012
In this case, if your sum assured is atleast 5 times of the annual premium in the policy, then the policy is exempted from tax on maturity.
- If the policy is issued on or after 01.04.2012
In this case if your sum assured is atleast 10 times of the annual premium, then there is no tax on maturity.
If the above condition is not satisfied then the maturity amount is taxable. It will be taxed as per your marginal rate.
What happened in from 1st October 2014?
If your policy is not exempted under Section 10(10) D as mentioned above, you were liable to pay tax on that income. But many policy holders were not paying this tax correctly. The finance bill 2014 included a new section 194DA, in the Income Tax Act 1961. As per this Section 194DA, the insurance company will deduct 2% TDS from the amount payable to you, if the policy is not qualifying under Section 10(10) D. If you don’t have a PAN or your PAN is not updated in the records, then the TDS will be 20%. The TDS will be applicable if the amount paid is above 1 lakh.
Who will be affected by this new rule?
Normally majority of the insurance policies are for long term. Such long term policies will automatically qualify for Section 10(10) D benefits, because the sum assured will be more than 10 times of the annual premium. But most of the single premium policies may not pass this test and will attract tax. If you are paying a single premium of 25,000 and if your sum assured is less than 2.5 Lakhs, then the maturity amount will be taxable and the company will deduct TDS under Section 194DA. In the absence of a PAN, many rural policy holders may attract TDS of 20%.
Though the insurance company is deducting 2% TDS under 194DA you have to add such income to your total income and again pay the additional tax as per your tax slab. If you are in the 30% tax slab, you have to pay the balance of 28%.
Can I do something to avoid this TDS under Section 194DA?
No. Being a tax rule, you have no way to escape this TDS. For future policies, you may recheck the sum assured before buying the policy. If the sum assured is more than 10 times of the premium, there is no tax on maturity.