Something happened very recently and very quietly, that can affect many life insurance policy holders in India, including you perhaps, to quite an extent. And that’s why we are putting up an article on it.
Has your life insurance policy suddenly become a leaking bucket?
There is a possibility. For those who have been trying to avoid paying taxes on the proceeds of Life Insurance policies while not maintaining the minimum 1:10 ratio between annual premium and Sum Assured, the new Sec 194DA now brings bad news and rightly so. And for the many who had not anticipated it, it appears to have caused continuing confusion and given a setback to their profit expectations. Read on for details.
Firstly, allow us to tell you what the benefit from Sec 10(10D) is all about.
BENEFITS FROM SEC 10(10D)
The Section 10(10d) states than any amount you get from a life insurance policy, including ULIP, traditional policy or term plan (and excluding annuity, pension plans, insurance policy for a disabled dependent and employer sponsored group life insurance) will not be part of your taxable income provided
– 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).
The above conditions do not apply to death claims or any amount received on death of the insured person. Also, there is no cap on the extent of tax free income from life insurance proceeds. Loans on policies will also not get affected.
The government of India in the New Finance Bill of 2014 has very quietly made a change that will affect those who hold a policy wherein the Sum Assured as described in the Policy Document is LESS than 10 times of the annual premium paid in any year during the term of the policy. Remember that this includes top up premium as well.
This change through Sec 194DA is with effect from Oct 1, 2014 and insurance companies have already started communicating this to the policy holders. If you haven’t received a communique yet, expect it soon.
WHICH POLICIES WILL GET AFFECTED
Most of the Single Premium policies are likely to get affected since most of them have either 100%, 105%, 125% or 700% of the Single Premium as Sum Assured. Unless you have consciously chosen to buy a Single Premium policy with 1000% of the Single Premium (i.e. 10 times of premium) as Sum Assured (which one would normally not do because Single Premium policies are generally taken for investment and not protection), your policy proceeds are going to be subject to TDS.
Some other life insurance policies which don’t have Sum Assured as 10 times annual premium are also likely to get affected. The best way to find out is to take out that policy document which is lying deep inside the closet, blow the dust away and go through the policy contract carefully.
A lot of customers who may not have PAN cards (especially those in rural towns) are likely to get affected with a 20% TDS deduction.
WHAT CAN YOU DO IF YOU ARE AFFECTED
Very little to stop the TDS itself, because the insurance company has no choice but to deduct it. If you had planned your financial goals based on that policy, make a correction in your expectations based on the tax that you will have to pay.
More importantly, you will now have to include the proceeds of such a policy when you file your returns for the year and depending on your tax slab, you could end up paying more as tax. Click on the link below to find out how to calculate taxable returns for a life insurance policy coming under Section 194DA.
It could also happen that you file for return of tax paid if your income is not in the taxable bracket. Whatever it is, don’t forget to include the policy itself, because the government unlike earlier times, now clearly knows the amount of money you have received.