13 November 2014
Tax Deduction at Source on Life Insurance Payouts
The Finance Bill of 2015 introduced a 2% TDS on the maturity of life insurance policies.
Who is this applicable to
Policy holders whose life insurance policy has a premium, paid in a year, exceeding 10% of the sum assured if the policy was issued after 1 April 2012 (20% if issued before that date). Governed by Section 10(10D) of the Income Tax Act, 1961.
Why
Many assessees, even though liable to pay tax on such proceeds, would not disclose this income in their tax returns — prompting the Income Tax Department to bring in a provision to plug this gap.
When applicable from
1 October 2014.
Who deducts
The insurance company.
Exemptions available
If the payout is less than ₹1,00,000 in aggregate in a year, the insurer will not deduct TDS on that amount — you'll receive the full proceeds for that year. However, you still have to show such proceeds in your tax return if the premium paid exceeds 10%.
Example of exemption
If A took a life policy with a sum assured of ₹10,00,000 for 10 years, the premium must not exceed 10% of that amount (i.e. ₹1,00,000 a year) to qualify for tax exemption. In that case, the premium qualifies for an 80C deduction each year, and the overall maturity proceeds are non-taxable — there's no TDS in this case.
When the 10% limit is crossed
If the premium is ₹2,00,000 instead, A is not eligible for the exemption:
- At payouts of ₹90,000 per year as maturity proceeds, there's no TDS liability.
- At payouts of ₹1,20,000 per year, the net proceeds will be ₹1,17,600 after deduction of TDS (₹2,400). This proceeds figure is inclusive of the original investment and bonus.
Who it affects the most
People who pay a single premium in one shot (rather than spreading it over the year) are most likely to cross the 10% threshold, and are therefore taxed when the proceeds mature.
Originally published November 2014. Tax rules around insurance payouts have been revised since — confirm current TDS thresholds and rates before relying on this.