Life insurance
This query is : Resolved
18 June 2018
A person joined for single premium life Insurance policy. He paid Rs 500,000 as initial premium and on maturity 800,000 received.
Insurance company deducted TDS on Receipts at the maturity time . is it Correct.
What is the taxability of maturity amount received on Life insurance policies
Insurance company deducted TDS on Receipts at the maturity time . is it Correct.
What is the taxability of maturity amount received on Life insurance policies
18 June 2018
It is taxable as Income from other source at normal rates. No deduction/exemption available for single premium policies
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19 June 2018
500000 lakh is his accumulated savings. he is in 10 Lakh plus slab. so this 8 Lakh rupees now received will attract 30 percentage tax . So the benefit he gained from the policy almost paid out as tax.
02 August 2024
When dealing with the maturity proceeds of a life insurance policy, especially single premium policies, it's important to understand both the tax implications and the TDS (Tax Deducted at Source) rules. Here’s a detailed explanation:
### **1. Taxability of Maturity Amount**
Under Section 10(10D) of the Income Tax Act, maturity proceeds from a life insurance policy are generally exempt from tax, provided certain conditions are met:
1. **Premium Condition**: For policies where the premium is paid as a lump sum (single premium policy), the exemption is available if the premium paid does not exceed 10% of the sum assured.
- **For Policies Before 1st April 2012**: The premium should not exceed 20% of the sum assured to claim exemption.
- **For Policies After 1st April 2012**: The premium should not exceed 10% of the sum assured.
2. **Policy Conditions**: The policy must have been issued by an insurer registered under the Insurance Act, 1938.
3. **Sum Assured vs. Premium Paid**: If the premium paid exceeds the prescribed percentage of the sum assured, the maturity proceeds will be taxable as income under the head “Income from Other Sources.”
### **2. TDS on Maturity Proceeds**
The insurance company is required to deduct TDS on the maturity amount if the maturity proceeds are taxable. However, the deduction should be based on the actual taxability:
- **TDS Rate**: For policies where maturity proceeds are taxable, TDS is deducted at the rate of 1% (if the policy is in force) or 40% (if the policy is terminated prematurely).
### **3. Tax Treatment for Your Case**
- **Initial Premium Paid**: ₹500,000
- **Maturity Amount Received**: ₹800,000
Assuming the policy was issued after 1st April 2012, you would need to verify if the premium paid is within 10% of the sum assured:
- **Sum Assured**: ₹800,000 (assuming this is the sum assured as well)
If the premium paid (₹500,000) exceeds 10% of the sum assured (₹80,000), the maturity amount is taxable. In your case, the premium paid is substantially higher than 10% of the sum assured, making the maturity proceeds taxable.
- **Taxable Amount**: ₹800,000 (the maturity proceeds)
- **Tax Rate**: Based on your income slab (30% as you mentioned being in the ₹10 lakh+ slab).
### **4. Action Steps**
1. **Check TDS Deduction**: Verify if the TDS deduction made by the insurance company was accurate. If TDS is deducted on an amount that should not be taxable, you might need to claim a refund.
2. **Declare Income**: Include the maturity amount in your income while filing your income tax return under "Income from Other Sources." Calculate the tax payable based on your applicable slab rate.
3. **Claim Refund**: If TDS has been deducted and the policy proceeds should not have been taxable, you can claim a refund when filing your return.
4. **Consultation**: It may be beneficial to consult a tax professional to ensure that you handle the taxability and TDS issues correctly, especially if there are complexities involved.
### **Summary**
In summary, if the premium paid for a single premium life insurance policy exceeds 10% of the sum assured, the maturity proceeds are taxable. The insurance company should deduct TDS on the taxable amount at the appropriate rate. Ensure to report this amount correctly in your income tax return and claim any refund if applicable.
### **1. Taxability of Maturity Amount**
Under Section 10(10D) of the Income Tax Act, maturity proceeds from a life insurance policy are generally exempt from tax, provided certain conditions are met:
1. **Premium Condition**: For policies where the premium is paid as a lump sum (single premium policy), the exemption is available if the premium paid does not exceed 10% of the sum assured.
- **For Policies Before 1st April 2012**: The premium should not exceed 20% of the sum assured to claim exemption.
- **For Policies After 1st April 2012**: The premium should not exceed 10% of the sum assured.
2. **Policy Conditions**: The policy must have been issued by an insurer registered under the Insurance Act, 1938.
3. **Sum Assured vs. Premium Paid**: If the premium paid exceeds the prescribed percentage of the sum assured, the maturity proceeds will be taxable as income under the head “Income from Other Sources.”
### **2. TDS on Maturity Proceeds**
The insurance company is required to deduct TDS on the maturity amount if the maturity proceeds are taxable. However, the deduction should be based on the actual taxability:
- **TDS Rate**: For policies where maturity proceeds are taxable, TDS is deducted at the rate of 1% (if the policy is in force) or 40% (if the policy is terminated prematurely).
### **3. Tax Treatment for Your Case**
- **Initial Premium Paid**: ₹500,000
- **Maturity Amount Received**: ₹800,000
Assuming the policy was issued after 1st April 2012, you would need to verify if the premium paid is within 10% of the sum assured:
- **Sum Assured**: ₹800,000 (assuming this is the sum assured as well)
If the premium paid (₹500,000) exceeds 10% of the sum assured (₹80,000), the maturity amount is taxable. In your case, the premium paid is substantially higher than 10% of the sum assured, making the maturity proceeds taxable.
- **Taxable Amount**: ₹800,000 (the maturity proceeds)
- **Tax Rate**: Based on your income slab (30% as you mentioned being in the ₹10 lakh+ slab).
### **4. Action Steps**
1. **Check TDS Deduction**: Verify if the TDS deduction made by the insurance company was accurate. If TDS is deducted on an amount that should not be taxable, you might need to claim a refund.
2. **Declare Income**: Include the maturity amount in your income while filing your income tax return under "Income from Other Sources." Calculate the tax payable based on your applicable slab rate.
3. **Claim Refund**: If TDS has been deducted and the policy proceeds should not have been taxable, you can claim a refund when filing your return.
4. **Consultation**: It may be beneficial to consult a tax professional to ensure that you handle the taxability and TDS issues correctly, especially if there are complexities involved.
### **Summary**
In summary, if the premium paid for a single premium life insurance policy exceeds 10% of the sum assured, the maturity proceeds are taxable. The insurance company should deduct TDS on the taxable amount at the appropriate rate. Ensure to report this amount correctly in your income tax return and claim any refund if applicable.
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