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Sec 194DA – Calculate Taxable Returns from Life Insurance

194DA-Tax-Calculation-on-Life-Insurance
  • Author

    MintWise

  • Date

    July 27, 2016

Disclaimer : This article to calculate taxable returns on impact of Sec 194DA is for general informational purposes only. It is not a substitute for professional tax-related or investment-related advice. We recommend you consult a tax professional before you act on this or related matters.

This is in continuation with the previous article on how introduction of Sec 194DA has enforced insurance companies to cut TDS on Life Insurance policies which are not compliant with Sec 10(10(d)) and whose income exceeds 1 lakh in a financial year. If you haven’t read that article yet, we strongly suggest you do that before you read this one. This article will specifically focus on how to calculate taxable returns based on the impact of this new Section 194DA.

Background

Firstly, let’s be honest here. When you had originally invested into a plan whose Sum Assured is less than 10 times of the annual payable premium, clearly with the motive of getting returns and not from the primary point of view of getting life insurance cover. So you shouldn’t be surprised if now, after this new Section 194DA has been introduced, your ‘investment’ in insurance is getting taxed.

Your life insurance policy may have suddenly become a leaking bucket. But you should not worry because you will not be worse off than your normal tax liability.

Most of the cases affected by Sec 194DA are Single Premium policies which do not meet the 1:10 criterion. Most traditional Single Premium policies almost always yield profits, i.e. net positive returns. However, ULIP Single Premium policies being market-linked may yield negative returns as well. That is, what you get as final returns may be less than the total premium you paid.

Calculate Taxable Returns in case of Profits from Life Insurance

This case is fairly straightforward. All you need to do is calculate the profits and add it to your income in the year of receiving proceeds from the life insurance policy. Here is an example to illustrate how the tax calculation works.

194DA Tax Payable Life Insurance Profits
Remember to also claim the TDS benefit, so you need to pay tax after adjusting the TDS already deducted by the insurance company before they paid you the maturity proceeds.

Calculate Taxable Returns in case of Losses from Life Insurance

This is where there is some ambiguity amongst many of our readers. In such a case, we refer to Circular No. 7/2003 dated 05-Sep-2003, Finance Act 2003 from the Income Tax department. As per that, tax should be paid on income accrued on life insurance policies which does NOT include premium paid by the assessee.

Here’s the extract from the said circular.

From Circular No. 7/2003 dated 05-Sep-2003, Finance Act 2003 – Explanatory Notes on provisions relating to Direct Taxes, www.incometaxindia.gov.in and reader inputs*

10.3 The insurance policies with high premium and minimum risk covers are similar to deposits or bonds. To ensure that such insurance policies are treated at par with other investment schemes, amendments have been made in section 88 and clause (10D) of section 10. The existing clause (10D) of section 10 has been substituted so as to provide that the exemption available under the said clause shall not be allowed on any sum received under an insurance policy issued on or after the 1st day of April, 2003, in respect of which the premium payable in any of the years during the term of the policy, exceeds twenty per cent of the actual capital sum assured. In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable. However, any sum received under such policy on the death of a person shall continue to remain exempt. The new provision also provides that the amounts received under sub-section (3) of section 80DD, shall not be exempt under this clause.

Therefore, when you calculate taxable returns if there is a loss from investment into the insurance policy, i.e. what you get as return (before TDS deduction) is less than what you paid as premium (including top-up), then no tax is payable by the assessee. This is pretty logical as well since premium you invested is anyway taxed earlier. It is also in sync with the treatment for most other investment products. It is surprising though that insurers are still deducting TDS on such cases.

194DA Tax Payable Life Insurance Losses
Shown above is the calculation of taxable returns from Life Insurance in case of loss from investment into a life insurance policy falling under Sec 194DA.

Customizing the Calculation of Taxable Returns

Please note the following for both the calculations above.

  1. Tax rate slab is assumed at 30%. You may make changes as per your actual tax rate.
  2. TDS and Tax payable shown here are only the basic taxes, i.e. they do not include any cess or surcharge. Please add/deduct them from payable amount/TDS respectively.
  3. Effective June 1, 2016 the effective TDS rate has been reduced from 2% to 1%. Please use the rate that is applicable for your policy.

We hope this helps you get clarity on how to Calculate Taxable Returns for life insurance policies under Sec 194DA. Do share your views in the discussion thread below. And while it is great that you are thinking of your investments, make sure that you protect your savings and assets with a term insurance plan.

*We are grateful for the inputs provided by Mr. P Singh on this topic.

To connect with one of our Trained & Certified Insurance Counsellors, please call our Customer Care No.1800 2121 344


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28 thoughts on “Sec 194DA – Calculate Taxable Returns from Life Insurance”

  1. MintWise says:
    July 21, 2017 at 9:18 AM

    Currently indexation benefit is only allowed for LTCGs and not for ULIPs. It is the law of the land and has been consistently so for a long long time. So we will all need to follow it.

    Can only suggest that one checks all tax implications in a product BEFORE making the investment.

    But it is a good approach and a great idea, Regis. Appreciate it and thanks for sharing.

  2. Regis says:
    July 21, 2017 at 12:05 AM

    Why is amount invested in ULIP not eligible for indexation? If someone has invested 1 L (>20% of sum assured) 10 years back and is getting maturity amount of 2 L in 2016. The index invested amount is 2.17 L. So this should effectively be a loss of 17K and not gain of 1 L. Please clarify.

  3. MintWise says:
    July 19, 2017 at 7:39 AM

    Dr Mamik, we couldn’t quite get the details completely. But we get the gist.

    In simple words,

    – it is no surprise that the TDS is listed in your 26AS. The 1% cut is because you have declared your PAN and hence that goes into your TDS. The deduction is valid because your Sum Assured to Premium is not as per the minimum requirement of 5.

    – 80C : Since you have not claimed it, there is no question of any clawback.

    – Tax is payable only on the gain. Which means, the maturity amount minus what you ‘invested’. If the final tax to be paid (including all your income) after taking the benefit of TDS already paid, is less than what you have already paid, please claim a refund. Else, pay only the difference and square it off. Check wih a tax consultant for exact details.

  4. MintWise says:
    July 18, 2017 at 9:20 AM

    1. Yes, because the ratio of SA to Premium is less than 5.
    2. No, the total amount received minus the total premiums paid is taxable. Deduct the TDS already paid. More importantly, 80C is not applicable for this policy. So you will have to reverse the benefits from that.
    3. That is something you will have to check with your tax consultant since it depends on lot of other things.

  5. Professor says:
    July 18, 2017 at 8:35 AM

    Hello SIr,
    Great Article and thanks for clarifying doubts. One query => My father had one policy in which he paid Rs 52000 as yearly premium(80C Tax exemption) for 5 years which has Sum assured of Rs. 2.5 Lakh (HDFC SL Sampoorna Samriddhi plan). the Policy now matured and and my father got the maturity amount of Rs 252000 in which TDS of around Rs. 2500 been cut?

    1. Is this section applicable for such matured amount?
    2. Will he need to show entire amount as Taxable or is there some caveat in this?
    3. Which ITR form my father has to fill?

    Thank you for your time…

  6. MintWise says:
    July 6, 2017 at 4:19 PM

    Yes, it is indeed applicable for one-time, i.e. single premium policies. In fact, most single premium policies by design do not provide very high life insurance cover and hence are considered primarily as investments.

    The entire 70k will be added to your income in the year in which it was received by you. It cannot be ‘spread’.

    Suresh, we would recommend you keep your investment and insurance separate from each other. Go for a term insurance plan from the same company or any other company – you will not need to buy any other life insurance product.

    In case you are interested in a term plan, here’s a link to help you choose.

    https://www.mintwise.com/term-insurance-compare

  7. SURESH says:
    July 6, 2017 at 2:52 PM

    Sir, I purchased one policy from TataAIA on 31/12/2011 with ONE TIME premium of Rs.1 lakh with sum insured Rs.1.10 lakhs ( foolishness!) . I surrendered the policy before due date and after completion of lock in period of 5 years on 5th January,2017 and received Rs.1,70,000/- The company deducted TDS @ 1% Rs.1701/- for which I have received form 16A from company.
    Now according to illustration in this article I have to show Rs.70,000/- as my income from other sources in ITR.
    My querry is whether 194DA is applicable to One time premium also? Can we spread it over 10 years (The policy Period) so that the sum assured will be more than 10 times.
    Please guide.

  8. MintWise says:
    June 26, 2017 at 9:40 AM

    Sir, in our view, your own tax-paid investment that is returned to you as principal cannot be taxed again. You will need to separate the gain from the investment in the year of income and pay tax accordingly. Kindly check with a tax consultant for a verified response.

  9. Sharma Yashwant Kumar says:
    June 25, 2017 at 2:15 PM

    sir,
    my point is linked to previous post on the subject in discussion.t
    it was in relation to “The question is, the payout at 3rd year and 6th year includes original investments in addition to interest/returns. So what amount is to be included in Income of that particular year. Parallel case being Interest on Bank FDs, where only Profit/Interest is shown as Income in the Tax Credit Statement – 26 AS”

  10. MintWise says:
    June 25, 2017 at 8:26 AM

    Sorry your query / concern is not very clear, Sir. Kindly add some details.

  11. Sharma Yashwant Kumar says:
    June 24, 2017 at 10:22 PM

    What is your take on this confusing situation, You have better resources than the client concerned, I expect you to take a initiative on such situations than referring to others.
    Thanks.

  12. MintWise says:
    June 19, 2017 at 9:12 AM

    Thank you for your inputs, Sir. We really appreciate it.

  13. Advocate Aditya sood says:
    June 18, 2017 at 5:46 PM

    Yes if you have income from salary plus other sources includes Fd interest and other income then use Itr No 1 and no salary income only received other sources income then use itr no 2 but if income received under section 194DA or tds has deducted under the same section it only clubed under the head of income from other sources.

  14. MintWise says:
    June 15, 2017 at 1:34 PM

    You can correct it when you file your returns. Ensure that you take benefit of the TDS amount already paid.

    Please check with your CA / Tax Consultant on how to declare it correctly.

  15. MintWise says:
    June 6, 2017 at 10:36 PM

    Yes, this will be added to other sources, but please use the ITR form depending on your main source of income. Do consult a tax practitioner for the same.

  16. MintWise says:
    March 14, 2017 at 9:23 AM

    John, a single premium of Rs. 25,000 growing to Rs. 21 lakhs is unlikely – do share the details of which policy this is and what it is that you are seeking to know.

  17. John says:
    March 12, 2017 at 2:42 PM

    what about surrender value on Future Plus growth policy? if withdrawn, will it be taxable? For example, Single Premium paid in 2005, Rs25,000, surrender value Rs 21,00,000

  18. Sougata Pandey says:
    January 3, 2017 at 4:57 PM

    Anil… No one is clear about this query. Let me know what stunt you are taking.

  19. MintWise says:
    December 20, 2016 at 10:26 AM

    Vishal, as long as the sum assured is more than 10 times the annual premium, the maturity amount will be tax-free under Section 10(10d) unless the rules are changed by the govt.

    But more importantly, if you are buying the policy for life protection, you should consider a term plan instead.

  20. vishal says:
    December 20, 2016 at 10:14 AM

    i plan for purchase a policy for 16 year appox 12 lac primum is rs 1.19 lacs for 8 year & ma amount is 20.94 is this amount is tex free kindly suggest so i will ourchase

  21. MintWise says:
    November 26, 2016 at 8:10 PM

    Only the interest/gains/returns are taxed. Ignore any/all parts of the original investment.

  22. Anil Kumar Khanna says:
    November 26, 2016 at 6:54 PM

    The question is, the payout at 3rd year and 6th year includes original investments in addition to interest/returns. So what amount is to be included in Income of that particular year. Parallel case being Interest on Bank FDs, where only Profit/Interest is shown as Income in the Tax Credit Statement – 26 AS

  23. MintWise says:
    November 26, 2016 at 10:54 AM

    Hi Anil, your query is very similar to the one in this link below. Do go through it and let us know if you need any further clarification.

    http://disq.us/p/1c17bjx

  24. Anil Kumar Khanna says:
    November 25, 2016 at 6:43 PM

    Hi, have purchased a Single Premium Policy – Bima Bachat of LIC. Premium paid Rs 5 lacs for Sum assured Rs 7 lacs. I have been paid Rs 103950 after deducting Rs 1050 as 1% TDS, after 3 years as 15% Survival Benefit. How much Income is to be counted as credited to me for the purpose of Income Tax. LIC has shown the entire amount of Rs 105000 as sum oaid to me.

  25. MintWise says:
    September 19, 2016 at 2:23 PM

    Dear Sujeeth,

    Following is our view. If you are a CA (as your name describes), you may have a difference in opinion. Do let us know if you do.

    LIC’s Bima Bachat is a single premium money back. The ‘investment’ is a principal that is invested in year 1 and you get return of this ‘principal’ + loyalty additions as ‘interest/returns’ at maturity. The ‘interest’ here would be obviously taxable as per 194DA.

    In addition to that, since there are periodic payouts (3rd year and 6th year in your client’s case), they would be treated as returns/interest/gain and would get added to the income for that year.

    Please consult a tax professional before acting upon this.

    Hope this helps. Do share your views, if they are different.

  26. CA Sujeeth Jain says:
    September 19, 2016 at 2:00 PM

    Hi, one of my clients had invested in LIC Bima bachat plan on 15-11-2012. The sum assured was Rs.30,00,000. Now he has received Rs.4,50,000 i.e 15% of sum assured in FY 2015-16 with TDS deduction @ 2% as 3 years has completed. He will receive another Rs.4,50,00 in 6th year and balance in 9th year. Kindly guide me regarding how to arrive at the income portion.

  27. Insurance Agency says:
    August 22, 2016 at 12:29 PM

    Great article with informative content.Thanks for sharing

  28. Suhas Walia says:
    July 28, 2016 at 11:40 AM

    Thanks for making it clear. My policy is under loss, so i do not have to pay any tax.

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