Tax on maturity of Insurance Policy

By | June 6, 2016

Tax on maturity of Insurance Policy

Tax on maturity of Insurance Policy

When the sum received on maturity of Insurance Policy is Taxable

  • Tax on maturity of Insurance Policy has to be paid on case of :- 

(a) receipt of any payment under a keyman insurance policy;

(b) receipt of  any payment under section 80DD(3)

Note : Section 80DD(3 ) is If the dependant, being a person with disability, predeceases the individual or the member of the Hindu undivided family , an amount equal to the amount paid or deposited ( by individual /HUF  for the maintenance of a dependant, being a person with disability,under the scheme of Life Insurance Corporation or any other insurer )  shall be deemed to be the income of the assessee of the previous year in which such amount is received by the assessee and shall accordingly be chargeable to tax as the income of that previous year.

(c) receipt of any payment under insurance policy issued during April 1, 2003 to March 31, 2012 where annual insurance premium is more than 20 per cent of capital sum assured;

(d) receipt of  any payment under insurance policy issued after March 31, 2012 where annual insurance premium is more than 10 per cent of capital sum assured; or

(e) receipt of  any payment under insurance policy issued after March 31, 2013 to a person covered under section 80U or 80DDB where annual insurance premium is more than 15 per cent of capital sum assured.

In cases covered by (c), (d) or (e) (supra), tax is not deductible if the payment is made on the death of a person.

When the sum received on maturity of Insurance Policy is Exempt

Any sum received under a life insurance policy is exempt subject to the condition that annual premium paid for such policies does not exceed 10 per cent (20 per cent if policy was issued before 1-4-2012) of actual capital sum assured. Section 10(10D) has been amended with effect from 1-4-2014 whereunder the limit has been increased to 15 per cent for insurance (if policy is issued on or after 1-4-2013) on the life of any person who is,––

  • a person with disability or a person with severe disability as referred to in section 80U; or
  • suffering from disease or ailment as specified in rule 11DD/section 80DDB.

Sum assured means minimum amount assured under the policy without including any premium agreed to be returned and/or any benefit by way of bonus.

TDS in case of sum received on maturity of Insurance Policy is Taxable

Finance (No. 2) Act, 2014 has inserted a new section 194DA relating to payment in respect of life insurance policy with effect from 1-10-2014.

Scope and application of section 194DA

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 clause (10D) of section 10, shall, at the time of payment thereof, deduct income-tax thereon at the rate of one percent. (two per cent before 01.06.2016)

No deduction under this section shall be made where the amount of such payment or, as the case may be, the aggregate amount of such payments to the payee during the financial year is less than one hundred thousand rupees.

Analysis of section 194DA relating to TDS in case of sum received on maturity of Insurance Policy is Taxable

  • No TDS is required if the amount payable during the financial year is less than Rs. 1,00,000.
  • If exemption is available to the recipient under section 10(10D), then the above TDS provisions are not applicable. Therefore  in the following cases TDS provisions of section 194DA are applicable

(a) any payment under a keyman insurance policy;

(b) any payment under section 80DD(3) or section 80DDA(3);

(c) any payment under insurance policy issued during April 1, 2003 to March 31, 2012 where annual insurance premium is more than 20 per cent of capital sum assured;

(d) any payment under insurance policy issued after March 31, 2012 where annual insurance premium is more than 10 per cent of capital sum assured; or

(e) any payment under insurance policy issued after March 31, 2013 to a person covered under section 80U or 80DDB where annual insurance premium is more than 15 per cent of capital sum assured.

In cases covered by (c), (d) or (e) (supra), tax is not deductible if the payment is made on the death of a person.

  • A keyman insurance policy which has been assigned before maturity to keyman (or any other person) during its term, with or without consideration, shall continue to be treated as a keyman insurance policy and TDS provision under section 194DA would be applicable.
  • Any payment under a policy [not being a keyman insurance policy or a policy cover under section 80DD(3) or section 80DDA(3)] issued prior to April 1, 2003, will not be subject to TDS provisions of section 194DA.
  • TDS provisions of section 194DA will be applicable whether payment is made at the time of maturity or otherwise. Suppose an insurance company gives a loan of Rs. 1,00,000 (or more) to a policyholder against an insurance policy (which was issued on or after April 1, 2003 and annual insurance premium is more than 20 per cent of sum assured), TDS provisions of section 194DA would be applicable at the time of release of loan amount to policyholder.

Apply for No TDS certificate for sum received on maturity of Insurance Policy if taxable total income is nil

In case of recipients whose tax liability on estimated total income is nil, the provisions of section 197A of the Income-tax Act has been amended so as to provide that the recipients of payments referred to in section 194DA of the Income-tax Act shall be eligible for filing self-declaration in Form No.l5G/15H for non-deduction of tax at source in accordance with the provisions of section 197A of the Income-tax Act. This amendment takes effect from 1st June, 2015.

When the sum received on maturity of Insurance Policy is exempt : Section 10(10D) of Income Tax act

(10D)    any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than—

(a)          any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA; or

(b)          any sum received under a Keyman insurance policy; or

(c)          any sum received under an insurance policy issued on or after the 1st day of April, 2003 but on or before the 31st day of March, 2012  in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured  or

[(d)         any sum received under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured:]

               Provided that the provisions of  sub-clauses (c) and (d) shall not apply to any sum received on the death of a person:

Provided further that for the purpose of calculating the actual capital sum assured under sub-clause (c) effect shall be given to the Explanation to sub-section (3) of section 80Cor the Explanation to sub-section (2A) of section 88, as the case may be] :

[Provided also that where the policy, issued on or after the 1st day of April, 2013, is for insurance on life of any person, who is—

(i)           a person with disability or a person with severe disability as referred to in section 80U; or

(ii)          suffering from disease or ailment as specified in the rules made under section 80DDB,

               the provisions of this sub-clause shall have effect as if for the words “ten per cent”, the words “fifteen per cent” had been substituted.]

Explanation 1.For the purposes of this clause, “Keyman insurance policy” means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person  and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration];]

Explanation 2.—For the purposes of sub-clause (d), the expression “actual capital sum assured” shall have the meaning assigned to it in the Explanation to sub-section (3A) of section 80C;

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