Tax Insights : TDS Applicable on Life Insurance

Pay-out Under Section 194 of Income Tax Act 1961!

As per the new section introduced in Income tax act 1961, people would get highly affected because of high TDS (Tax deducted at source) on their sum insured benefit.

Section 194 DA under Income tax act 1961 says that the policies that are not exempted under section 10 10 (D) would be affected by the deduction of TDS on the pay-out. This section came effective from October 1st, 2014.

The rate of TDS would be @ 2% on any pay outs that exceeds Rs.1,00,000 per year and @ 20% for those who are not having their PAN Cards.

Section 10 10 (D) of Income tax act 1961, specifies that any ULIP policy bought after April 2012, would be exempted from tax if the premiums paid in any of the year are less than 10% of sum insured. All the policies that are bought from April 2003 to March 31st 2012, the exemptions were granted to those, whose premium does not exceeds 20% of sum insured.

But, the concept of tax deducted at source for those policies pay outs, whose premium in any year exceeds 10% of sum insured, would adversely affect some class of people like:

• Single premium payer as the amount of single premium would in most of the cases exceeds 10% of sum insured.
• People who have chosen additional riders as the total premium in most of the cases would exceed 10% of sum insured.
• Older people whose premium would be really high would mostly exceeds 10% of the sum insured.
• People living in small towns or villages, who do not have PAN cards with them.

Such deduction of TDS would make your pay-out sum lesser and even lesser for those who do not have PAN cards.

Actionable to avoid TDS:

1. Please ensure you have made your PAN CARD & update the details with your Insurance Company

2. Buy regular premium policies & ensure that the Sum Assured is greater than 10 times of your Annual Premium