Life insurance policy: Know here how much TDS you pay on maturity

If you think elimination of PAN details on this policy will help you avoid TDS, you should know that section 194DA guides 20% tax deduction on maturity claims pay out.

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TDS is deducted at 1% on maturity claims payable to policy holder if Permanent Account Number (PAN) is available.

Life insurance in our country is a very traditional form of investment due to its safe and guaranteed return. However, we should know that the gains on life insurance is taxable.

It is defined as a contract between an policy holder and an insurer, wherein, the insurer promises to pay a classified beneficiary a sum of money in exchange for a premium (paid by policy holder) upon the death of an insured person.

Those who try to avoid taxes on proceeds of insurance policies, and do not maintain the minimum 1:10 ratio between annual premium and sum assured, must know that there is a section called 194DA which comes as a bad news for them.

For understanding section 194DA, one needs to first learn about section 10(10D).

Section 10 (10D) refers to any amount you get from a life insurance policy even involving ULIP, traditional policy or term plan - are not part of taxable income.

Polices that are free from any income tax deduction as per the section are:

Premium in any year is more than 20% of the sum insured if it were bought after 1st April 2003, but before 31st April 2012
Or is more than 10% of the sum insured if it were bought after 1st April 2012
Or is more than 15% of sum assured for policies bought after 1st April 2013 for disabled or those suffering from ailments (as per section 80DDB).

Above mentioned guidelines is also not applicable to death claims or any amount received on death of the insured person.

There is no cap on the extent of tax free income from life insurance proceeds, whereas the loans on policies also are not affected.

It may be noted that the above mentioned section is not applicable for annuity, pension plans, insurance policy for a disabled dependent and employer sponsored group life insurance.

For the ones which do not fall under section 10 (10D), then comes section 194DA into the picture.

Effective from June 2016, tax are deducted at source (TDS) on insurance pay out to Indian resident citizens in case the cumulative amount across all policies (which do not come under ambit of section 10(10D) equals or exceeds Rs 1 Lakh in a financial year.

TDS is deducted at 1% on maturity claims payable to policy holder if Permanent Account Number (PAN) is available.

If you think elimination of PAN details on this policy, will help you avoid TDS, then remember section 194DA guides 20% tax deduction on maturity claims pay out.

In case you are an NRI, the section 195 of Income Tax says, every policy exempted under section 10(10D), will see no tax deduction. Also, tax is not deductible for countries where Double Taxation Avoidance Agreement (DTAA) benefit is available.

In case of non-exemption in section 10(10D), TDS is levied according to section 195.

According to BankBazaar report, the majority of insurance policies are long duration policies and such policies are eligible for full maturity claims since the sum assured will be more than ten times the annual premium paid for the policy as per Section 10(10).

Policies with single premium mode may sometimes lose this benefit, the report said.

Here's how you can calculate tax on maturity claims, as per BankBazaar.

As per Section 194DA, for deduction of 1% TDS on the maturity claims, the policyholder has to include the maturity amount in the total income. The policyholder also needs to calculate the difference amount of tax payable as per the applicable slab.
If the policyholder falls in the 30% slab, he or she has to include the maturity amount in the total income and pay 28% additional tax for the maturity claims.

In order to avoid paying tax on the maturity claims, a policyholder needs to be careful at the time of purchasing the policy and should ensure that the sum assured is more than ten times the annual premium paid for the policy, the report added.

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