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.
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.
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.
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.
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.
- Tax rate slab is assumed at 30%. You may make changes as per your actual tax rate.
- 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.
- 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.