Tax saving is a primary motive in every investor’s mind. That is why people try and invest in tax-saving avenues that help in lowering their tax liability. When it comes to life insurance policies, one of their USPs is tax-saving. Life insurance policies allow tax relief on both the premiums paid and the benefits received. That is why many of you prefer buying a Life Insurance policy along with the fact that it ensures financial security. However, there is confusion among many individuals regarding TDS (Tax Deducted at Source) on life insurance policies. Many of you don’t understand whether there is a TDS element in the premium paid and the benefit received. Is there? Let’s find out –
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What is TDS?
Before we move on to the TDS implication on life insurance policies, let us understand what TDS is. TDS is a tax that is deducted from the earnings before they are paid to you. This tax is then deposited with the Income Tax department in advance on your behalf. If your tax liability is lower than the TDS deposited you can claim a tax refund on the TDS deposited.
TDS on insurance policies
In the case of insurance policies, TDS might factor in the benefits received. Let’s understand how TDS applies in life insurance–
- On the maturity or death benefit – the benefit received from a life insurance policy is exempted from tax under Section 10 (10D) of the Income Tax Act. There are certain qualifying conditions under this section. If the insurance policy qualifies on the prescribed conditions, TDS is not deducted. If, however, the policy does not qualify under such conditions, TDS would be deducted from the benefits.
Now you must be wondering what the qualifying conditions are. These conditions include the following:
- The sum assured should be at least 5 times the annual premium amount for policies that have been issued before 31st March 2012
- For policies that have been issued on or after 1st April 2012, the sum assured should be at least 10 times the annual premium amount
If these conditions are fulfilled, no TDS is deducted from the maturity or death claim. If, however, the conditions are not fulfilled, TDS is deducted from the maturity amount.
Deduction of TDS
According to Section 194DA, if your PAN details are available, TDS is deducted at the rate of 1%. If, however, PAN details are not available TDS is deducted at the rate of 20%. TDS is deducted if the maturity amount is Rs.1 lakh and above.
For NRIs, TDS is deducted under Section 195 if the qualifying conditions of Section 10 (10D) are not fulfilled. TDS would, however, not be deducted for NRIs residing in countries that have the benefit of a Double Tax Avoidance Agreement (DTAA).
Life insurance policies are, usually, free from the implication of TDS. However, if the prescribed rules are not fulfilled, the maturity benefit is taxable. So, understand the implication of TDS on your life insurance policy to understand the taxation on your policy benefits.
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