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Article Dated 21st December, 2023

Beyond the Premiums: A Tax Perspective on Life Insurance Services

We will delve into four critical sections of the Income Tax Act that significantly impact the taxation landscape for life insurance services: Section 194D and Section 194DA, governing Tax Deducted at Source (TDS), Section 80C, offering deductions from total income, and Section 10(10D), providing exemptions for maturity receipts. Together, these sections form the cornerstone of taxation policies associated with life insurance, influencing both the premiums paid and the benefits reaped.

Section 194D: TDS on payment of Insurance Commision

Any person responsible for paying to a resident any income by way of remuneration or reward, whether by way of commission or otherwise, for soliciting or procuring insurance business (including business relating to the continuance, renewal, or revival of policies of insurance) shall deduct tax on such amount at the prescribed rate. The TDS shall be deducted at the time of payment or crediting the party whichever is earlier.

TDS shall be deducted at the rate of 5% in case of payment to residents other than a domestic company and 10% in case of payment to a domestic company. However, no TDS shall be deducted in a case where the amount of such income paid or credited during the financial year does not exceed Rs.15,000.

Section 194DA: Payment in respect of life insurance policy

Any person responsible for paying to a resident any sum under a life insurance policy, including the sum allocated by way of bonus on such policy shall deduct tax at the rate of 5% at the time of payment of such amount. TDS shall be deducted from the amount paid at the time of maturity of an insurance policy.

However, no TDS shall be deducted if such maturity amount is exempted under section 10(10D). Also, no TDS is required to be deducted if the maturity amount does not exceed Rs.1,00,000.

Now, the catch here is that TDS shall be calculated at the rate of 5% of the income component and not on the amount of payment. The income component means the maturity amount minus the premium paid.
For example, if Mr. A has taken an insurance policy in for which he paid 10 installments of Rs.15000 each. At the time of maturity, he got Rs.2,50,000. So the TDS will be calculated only on the income component i.e.,

5% of [2,50,000-(15,000*10)] = Rs.5,000.

So, Rs.5,000 will be the TDS amount.

Section 10(10D): Taxability of sum received under a life insurance policy

Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy would not be included in the total income of a person. However, this provision has the following exceptions where the sum received under a life insurance policy will be included in total income:

  1. Any sum received under section 80DD(3) section 80DDA(3).

    Accordingly, if the dependent disabled, in respect of whom an individual or the member of the HUF has paid or deposited any amount in any scheme of life insurance, predeceases (dies before) the individual or the member of the HUF, the amount so paid or deposited by the insurance company, shall be deemed to be the income of the assessee of the previous year in which such amount is received. Such an amount would not be exempt u/s 10(10D).

  2. Any sum received under a Keyman insurance policy

  3. For policies issued between April 1, 2003, and March 31, 2012, if the premium payable for any year during the policy term exceeds twenty percent of the actual capital sum assured.

  4. For policies issued on or after April 1, 2012, if the premium payable for any year during the policy term exceeds ten percent of the actual capital sum assured. However, if where the policy, issued on or after the 1st day of April, 2013, is for insurance on life of any person, who is:

    • a person with disability or a person with severe disability as referred to in section 80U

    • suffering from disease or ailment as specified in the rules made under section 80DDB

      the threshold of 10% is increased to 15%. That is premium amount can be upto 15% of sum assured.

  5. For policies issued on or after April 1, 2023, exemption would also not be available if the amount of premium payable exceeds 5,00,000 for any of the previous years during the term of such policy (other than ULIPs).

    Provided for points 3, 4 and 5 shall not apply to any sum received on the death of a person, i.e., if the sum is received on death instead of maturity, and the premium has exceeded the 20%/10%/5,00,000 threshold, then also, the sum received on death will be exempted.

  6. Further, exemption would also not be available with respect to ULIP issued on or after 1.2.2021, if the amount of premium payable exceeds 2,50,000 for any of the previous years during the term of such ULIP. Such ULIP would be specified ULIP, which is a capital asset

Section 80C: Deduction from Gross total income in respect of insurance premium paid:

Section 80C provides for a deduction from the Gross Total Income, of savings in specified modes of investments. Specified mode of investment includes payment of Premium paid for insurance on the life of the individual, spouse or any child (minor or major) and in the case of HUF, any member thereof. This will include a life policy and an endowment policy.

The deduction under section 80C is available only to an individual or HUF. The maximum permissible deduction under section 80C is 1,50,000.

Also, following conditions are to be fulfilled to claim the deduction under section 80C for payment of premium of a life insurance policy:

  • The life insurance premium paid should not exceed 10% of the sum assured for policies issued after April 1, 2012.

  • For policies issued before April 1, 2012, the premium paid should not exceed 20% of the sum assured.

  • Policies issued after April 1, 2013, covering an individual with a disability (Section 80U) or a specified disease (Section 80DDB) should not exceed 15% of the sum assured to claim the deduction.

CA Pranay Jain is a young and aspiring Chartered Accountant. He qualified Chartered Accountancy Course in 2021 and has a well-established practice in various fields of taxation and auditing, with his core area of practice being in the field of litigation i.e., handling assessment and appeal-related matters and representing assesses before various tax departments.

He is also socially active on LinkedIn at linkedin.com/in/capranayjain

CA Pranay Jain
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