TDS on Life insurance policies w.e.f 1st October 2014

If you have any life insurance policy, then recently you must have received a mail from your insurer regarding the TDS on life insurance policies to be deducted out of your policy proceeds. I have been receiving many queries regarding this, saying they are feeling cheated since at the time of buying they were told that the policy proceeds will be tax-free.

Though I have answered them as per the respective policies they have, it is important for all of you to know about the change in taxation law which was announced in the Budget 2014. To remove the confusion I have written this detailed post on TDS on life insurance policies.

Tax laws related to insurance policies

Life insurance policies are structured around 2 income tax sections. Section 80C and Section 10(10)d.

If the Life insurance policy you have, be it ULIP or Endowment, is providing you insurance cover of 10 times of your annual premium, then you can claim tax benefits under both the above-mentioned sections.

You can claim a tax deduction on the premium paid in last financial year u/s 80C up to a maximum limit of Rs 1.50 lakh, and also the maturity proceeds you get will be tax-free u/s 10 (10d). (Read: All qualifying Investment and expenses under section 80c)

In other words, if the premium you are paying is 10% or less of the sum assured/death benefit then you can enjoy the benefit of section 80c and 10(10d).

Important: If the policies were bought before April 2012, then to claim benefit under 80C and 10(10d), your insurance cover should be at least 5 times of annual premium.

But if your policy is not satisfying these conditions then your 80c benefit would be restricted to 10%/20% of sum assured as the case may be and your policy maturity proceeds will not be tax-free under section 10(10d)

Let’s understand this in some cases:

Case 1: Rajan has one Life insurance policy, bought in 2005, with an annual premium of Rs 50,000/-. The policy has sum assured of Rs 3 lakh. The policy is due to mature next year in 2015. He wants to know if the maturity proceeds are taxable?

Answer: NO. As the policy was bought before April 2012 and has sum assured more than 5 times of premium amount, then it satisfies the condition of section 80C and 10(10d) and thus is not taxable.

Case 2: Samar has bought one pension plan in 2007, with an annual premium of Rs 10,000/-. It doesn’t have any sum assured attached to it. What would be the taxability of this policy on maturity?

Answer: As theirs is no sum assured attached to this policy then it doesn’t attract section 10(10D) and thus the maturity/surrender proceeds will be taxable. However being a pension plan, the premium payments come under section 80CCC, and he can enjoy the tax benefits on premium payments.

Case 3: Last year in 2013 Simran bought 2 policies, one a pension plan for her retirement planning and other one ULIP for investments. In a pension plan, she’s paying a premium of Rs 20000 and has insurance coverage as “higher of fund value on the date of intimation of death or 105% of premiums paid”. While in case of ULIP she is paying a premium of Rs 1,00,000/- and having a cover of 15,00,000/-. She want to know the taxability of these policies on maturity?

Answer: Though Simran has some insurance cover in case of pension plans this is not satisfying the condition of 10 times of annual premium. The other ULIP policy has sufficient cover.

So in case of the pension plan maturity proceeds or even the monthly pension amount is taxable, but in case of ULIP maturity proceeds will not be taxable.

Case 4: 2 years back in Jan 2012 Rahul bought one single premium plan, with an insurance cover of 1.25 times of premium, he wants to withdraw the policy after completion of 3 years. He wants to know if the Maturity proceeds would be taxable.

Answer: Yes, the maturity proceeds would be taxable. Since the policy was brought in Jan 2012, so in this case the policy should provide a cover of at least 5 times of annual premium, to make it tax-free.

Applicability of TDS on life insurance policies

TDS on life insurance is applicable on the maturity proceeds of taxable policies, as explained above i.e which are not satisfying the condition of death benefit/Sum assured equal to or more than 10 times of annual premium.

Finance Act 2014 has introduced a new TDS provision under section 194DA in the Income Tax Act, 1961 on insurance policies

As per the new section (effective from 1st October 2014), if the policy proceeds are not eligible for exemption under Section 10(10D) of the Act and your total payout value (policy proceeds due ) w.e.f 01.09.2019 the TDS will be deducted only on the taxable value of Policy i.e. less the premium paid (check the excerpts as per Budget 2019 memorandum below) , for the proceeds exceeding  Rs. 1 lakh.

TDS on liTDS will be deducted at the rate

Earlier the onus is on the policyholder to disclose the type of policy and pay tax(if any) on the maturity proceeds, but slowly this has become a point of tax evasion. Many people evade it knowingly and others under ignorance. This TDS on life insurance policies would automatically plug this issue and bring the attention of taxpayers and income tax authorities on the taxability of maturity proceeds

(Also Read: Tax Implications when you discontinue Life insurance policy)

TDS on Life insurance policies – What to do?

TDS on life insurance policies is applicable from 1st October 2014. There’s nothing much policyholders can do now about it, but those who now know that their policy is taxable should get their PAN number registered with the insurer to avoid getting 20% TDS deducted.

Disclaimer: I am not an Income tax expert. The Information shared in the article and the comments below are to the best of my understanding, from different sources, articles, and discussion with other experts on this subject. Before acting on any of the statement, do consult a tax professional.

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276 COMMENTS

  1. Dear Sir, I have purchased a ULIP SINGLE PREMIUM LIC policy By investing a amount of Rs 2,00,000/– in the year 2010. This policy get surrender after lock up period of 5 years, in the year 2016, with a matured amount 2,90,000/–. The policy in the name of individual NOT any firm. LIC deduct TDS @ 2% with amount 5800/–. Now, sir please advise me, which amount I have to show in other income box in my ITR either it is 2,90,000/– OR 90,000/–. The product is ULIP.

    RAM

  2. Hi Sir
    Will Child Education rider sum assured be considered as Total Sum assured for the eligibility criteria of 10/20% under Section 10 10 d?
    Also will this section apply only if I surrender my policy after holding it for 5 years?

    • Child education rider premium is a part of total premium against which you have got additional insurance cover. This applies as long as you are holding this policy. While buying and till the time of surrender/maturity , you should have required cover as asked for in 10(10)d

  3. Sir, Hi!
    Thanks for your posts which are very helpful. I have a query:

    On 28th Aug. 2005 brought LIC’s Komal Jeevan, Single premium policy for my Son (SA 10L). Last year he turned 18 years and he was paid 20% (2L) of the sum assured. Since, we had provided his PAN number, IT was deducted TDS at 1% (i.e. Rs. 2,000/-). The query is how should we mentioned the amount paid in IT return? Should the entire 2L come under other income? Please note my son has some rental income as well.

    Since, 10L were initially invested, 20% return can be assumed from the same principal. In which case its the return of principal, which is from a tax paid income. Why charge income tax on it again? Even if we assume 20% is from some, interst income (based on Guaranteed additions), Should we not get the indexation on the amount invested in amount be taxable? SHould we not get indexation benefit on the amount invested.

    Pls advice.

    Thanks and Regards,
    Swapnil.

    • See, as per my understanding the complete Rs 2 lakh is taxable. Insurance income doesn’t come under Capital gains so you cannot claim Indexation benefit. You should go as per your CA’s advice, as he will be the one who will represent you in the case of any query put up by tax authorities.

  4. Sir I have taken policy pension plan in 2009 sum assure R’s 400000
    Yly premium 120000 for 10years
    Now I want surrender my policy with benefits of R’s 342000
    Is only benefit amt is taxable or total amt

  5. Dear Mr Singal,
    I am not able arrive at the answers to my specific query from the very many valuable answers you have given in the posts above. Hence I am troubling you again.
    I bought LIC Samridhi Plus with single premium of Rs 5 Lac in March 2011. The insurance cover was for Rs 6.25 Lac. This was a 10 year policy.
    I recently closed the policy prematurely and got Rs 8,75,000. TDS of Rs 8,750 was deducted by LIC. Please clarify as to what I need to show as this year’s income ( I come under 30% slab)
    a) Full 8,75,000 and pay 30% i.e. Rs 2,62,500 less 8,750
    b) Gain of Rs 3,75,000 and pay Rs 1,12,500 less 8,750
    c) LTCG of Rs 3,75,000 and pay tax with Indexation benefit
    Look forward to your advise.

  6. Dear Mr. Singhal,

    My name is Ajay and I based in Dubai UAE. 10 Years back I took a Policy from HDFC Life through HDFC Bank. It is called Savings Assurance Plan. Now it is nearing maturity. HDFC has asked me to file TRC and Form 10F. As you are aware in UAE we do not have any taxes for individuals I will not able to get any TRC. Please let me know what will be TDS reduction for product. There was a life insurance associated with this and the coverage was about 2.5 million for an annual premium of 300k.
    Thanks for your support

  7. Hello, i have purchased a ICICI Life Super Pension insurance in the year 2007 and i have consequently paid the annul premium of RS. 50,000/- for about 10 years and now my policy is going to be matured on 23rd November 2017 and the value fund of the said policy is Rs. 11,00,908/- approx as per today’s NAV rate. I had a query made regarding the total fund value to be reimbursed without tax free benefit. Furher, i would glad to know whether i have to pay tax for 2/3rd amount of fund value and the rest 1/3rd amount is free of tax ???. Also i would like to know that above you have mentioned that the TDS is been applicable from 2014 but i have purchased the policy in year 2007 still do have to pay TDS of 2% *(with valid PAN card)??

    Lastly also i wanted to ask that does this ICICI super Pension Policy comes under ULIPS or taxable pension plans ???

    Further, ICICI bank agents duped their own customer for gaining another target to reach!!!

  8. Hi Manikaran,

    I have a query regarding LIC Wealth Plus Policy. The policy was bought back in March, 2010 for 8 years of term with 4 in quantities and each policies had a single premium amount of Rs 50,000/- where each of the policy bonds shows the minimum sum assured as Rs 65,000/-.

    Now, as per LIC Wealth Plus scheme, at maturity (March, 2018), it would payout at the highest NAV Available throughout the policy term and I have no idea what amount would I get back at the time of Maturity in March, 2018. Even, LIC Agent is unaware of it when asked and he is saying some 2.5 times of amount I should receive at the time of maturity. Hence, I should receive amount around 4 Lakh or more for my 4 Policies, is it so?

    Now, my queries are as follows :
    1. whatever amount I receive on maturity in total for those 4 policies, will that amount is subject to TDS? If so, then at which % of rate?
    2. If TDS is deducted then how would I know that TDS has been deducted at the time of Payout?
    3. If TDS is deducted then should I show that on ITR-1? At which section should I show that? At the head of “Income from Other Sources”?
    4. Which would be the taxable income? The total Maturity Amount or the Maturity Amount minus the Total Premium Paid?

    It would be great if you read and understand my queries. I am looking for your fruitful reply in these regard as I still don’t know how much amount I would get back at the maturity time and whether I have to show that in ITR-1 or not? Whether I would have to pay tax for that or I can skip showing the amount whether its tax free or not.

    Thanks and Happy New Year 2018 in advance.

    • 1. Yes. 1% if PAN is registered in the policy, else 20% Please confirm this from LIC office.
      2. Don’t understand this point.
      3. TDS is the tax deducted at source, this is not the income.
      4. In your case, since the sum assured is less than 5 times the premium amount, so according to me full maturity amount will be taxable.

      On taxability ofthe policies, there are many divergent views…i would advise you to consult your CA or tax lawyer and pay tax accordingly.

      • Thanks a lot Manikaran for your reply. I understood point 1 and 4.

        About point 2, which u replied that u didn’t understand, I want to re-illustrate that if TDS is deducted at the time of final payment, will that details reflect on Form 26 AS against my PAN?

        And about point 3, I am sorry for misinterpret the same. Yes, TDS is the TAX Amount which need not to show on ITR-1 but what I want to know that if final payment is paid by LIC after applying the appropriate TDS, should I show that final payment amount (or the actual maturity amount credited into my bank account through NEFT from LIC) under the head of “Income from other sources”?

        It would be great, if you clear these two doubts of mine. Thanks a lot once again for replying. Looking for your reply on these two point I just mentioned in this reply.

        • TDS deduction should get reflected in 26 AS form.
          Yes, you have to show the final payment amount under Income from Other sources if the surrender proceeds are taxable.
          See, here some CAs have different Interpretation, thus I would suggest you consult a Good CA on this and get your Returns filed.

  9. Hi Manikaran,
    my query is regarding foreclosure of the insurance , i.e. my premium maturity date is 5 years from now. but i want urgent money for taking a home loan. so planning to close this insurance plan, i had paid for the earlier tax periods and claimed tax savings under 80C, will i have to pay tax on the money withdrawn.
    I ‘ve served for the minimum period the insurance policy says. Kindly guid me on the tax payable for the earlier tax period.
    thank you so much
    Nithin

    • If you have paid for a minimum of 5 years then the 80C tax benefits that you have already claimed will not be reversed. However, whether the surrender proceeds will be taxable or not depends on the Sum assured and current status (inforce/paid up)of the policy.

  10. Hi Manikaran,

    The Article is very helpful.. Thanx.

    I had brought ICICI Prudential LifeTime policy in 2004. It is a open policy and the death benefit amount is 200000, the policy period is for 70 yrs and i am paying premium of 24000 yearly. The policy is put under maximizer plan and is in force.

    Recently i did a partial withdrawal of 200000, for which i have got the TDS of 1% (i.e 2000) deducted.

    Now my query here is that, should i declare 200000 of the partial withdrawal amount as part of “Income from other sources” ?? will submitting the income tax returns??
    If i add this amount to “income from other sources” then i have to pay up around 70000 as extra tax, which means the complete 200000 amount is taxable..

    Need your inputs on the same..

    Thanx & Regards,
    Santu..

    • Santosh, if your policy is in force and your sum assured is still active on annual premium of Rs 24k, then TDS should not have been deducted out of it. It may be possible that with this partial withdrawal, the Sum assured must have been reduced in the balance amount.
      Generally, it has been seen that when TDS is deducted then the Policy proceeds are taxable, and when taxable it is completely taxable not just the gain amount, but the complete withdrawal amount

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