Under Section 194DA of the (I-T) Act, 1961, insurance companies in India have been made liable to deduct tax at source in case of life insurance policy maturity payment. This means any payment made to insurance policy holders by the company is taxable at the time of payment. TDS is also deducted on the bonus payment.
“Any person responsible for paying to a resident any sum under a life insurance policy, including the sum allocated by way of bonus on such policy, other than the amount not includible in the total income under (Section10D), shall, at the time of payment thereof, deduct income tax thereon at the rate of 5% on the amount of income comprised therein,” reads the section.
Exemption
As mentioned in the text, no TDS under this section is deducted if the life insurance policy comes under Section 10(10D). Maturity amounts that fall under this section include:
- Annuity pay-out
- Pension plan pay-out
- Death pay-out
- Benefit not for a policy issued under Section 80DD (3)
- Pay-out not available under the Keyman Insurance Policy
- Pay-out is not received under an employer-sponsored group insurance scheme
- Premium paid during any year must not exceed 20% of the sum assured for policies purchased between April 1, 2003, and April 30, 2012
- If the policy is purchased after April 30, 2012, the premium amount should not be more than 10% of the sum assured
- Insurance premium payable in any year should not exceed 15% of the sum assured for the policy. It must be purchased on, or after April 1, 2013. The insurance must be for the life of any person who is:
- With a disability, or severe disability as per Section 80U.
- Has any disease, or ailment as specified in the rules under Section 80DDB.
Know that the maturity amount received through a single premium insurance policy is taxable, and not exempted under Section 10(10D). In this case, the maturity amount will be tax-free only if the minimum sum assured is 10 times the single premium amount paid for the policy’s tenure.
Note, no TDS will be deducted if the taxpayer’s total income is below the basic exemption limit and they submit Form 15G/Form 15H to prove it.
A commissioned employee is qualified for reduced, or NIL TDS under Section 197.
Payment threshold
Deduction under Section 194DA is made only if the payment in a financial year is more than Rs 1 Lakh. On any payment less than that, no TDS is applicable.
TDS Rate
The insurer will deduct 5% TDS from what is perceived as the income part of your insurance policy payment. In case you don’t have a PAN, the TDS imposed would be 20%.
TDS rate under Section 194DA
Life insurance maturity payment typeTDS rateLife insurance companies5%Other Indian companies10%Where a taxpayer does not submit PAN details20%