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Understanding the taxation of life insurance payouts can be confusing, but policyholders in India must be aware of the relevant provisions under the Income Tax Act, particularly Section 194DA. This section deals with the Tax Deducted at Source (TDS) applicable on life insurance payments.
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According to the Budget 2024 proposal, you will receive a higher payout from your life insurance policy because the TDS rate has been reduced from 5% to 2%. Let’s understand in detail what is TDS on life insurance payouts.
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Section 194DA specifically addresses the taxation of payments made under life insurance policies. It mandates that when a life insurance company makes a payout—whether it's maturity benefits or death benefits—there is a legal obligation for the insurer to deduct TDS before disbursing the remaining amount to the policyholder.
TDS Applicability in Life Insurance:
Under Section 194DA, any person making payments to a resident under a life insurance policy, including bonuses, must deduct income tax at a rate of 5% on the income portion of the payment, excluding amounts exempt under Section 10(10D).
Time of Deduction:
TDS is deducted at the time the policy amount is paid out, ensuring taxes are collected efficiently.
Exemptions:
Not all life or term insurance payouts are subject to TDS. Under Section 10(10D) of the Income Tax Act, payouts from life insurance policies can be exempt from TDS if certain conditions are met. For instance, if the premium paid is less than 10% of the sum assured and the policy has been active for a specified number of years, the payout may be tax-free.
Procedure for Deduction:
The insurance company must obtain a valid PAN (Permanent Account Number) from the policyholder.
If applicable, the company will deduct the TDS and pay it to the government within 30 days after the end of the month in which the deduction was made.
A TDS certificate, in Form 16A, should be issued to the policyholder, detailing the amount deducted.
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Compliance with Section 194DA is essential for both insurers and policyholders while they understand the tax benefits of life insurance in India. Non-compliance can lead to penalties and interest, adding financial stress on both parties. For policyholders, understanding TDS on their insurance payouts can also prevent unexpected tax liabilities.
Compliance with Section 194DA involves several key requirements that both insurers and policyholders need to be aware of:
The TDS deducted must be deposited with the government within 30 days from the end of the month in which the deduction occurred.
Policyholders can claim credit for the TDS when filing their income tax returns.
The payer (insurance company) is obligated to issue a TDS certificate to the payee (policyholder) in Form 16A within 15 days from the due date of depositing TDS with the government.
The payer must file a quarterly TDS return in Form 26Q with the government, detailing the TDS that has been deducted and deposited.
Non-compliance with the provisions of Section 194DA can lead to various penalties and interest charges:
If the payer fails to deposit TDS by the due date, they are liable to pay interest at a rate of 1.5% per month or part of a month until the TDS is deposited.
For non-filing of the TDS return by the due date, the payer will incur a penalty of Rs. 200 per day until the return is filed.
If incorrect information is provided in the TDS return, the payer may face a penalty ranging from Rs. 10,000 to Rs. 1 lakh.
Section 194DA of the Income Tax Act plays a significant role in how life insurance payouts are taxed in India. While the prospect of TDS might seem overwhelming, knowing the rules can help you manage your finances more effectively. Always consult with a tax professional if you're unsure about your specific situation or if your policy meets the exemption criteria under Section 10(10D). This knowledge can ensure you’re not paying more tax than necessary and help you make informed decisions regarding your life insurance policies.
Note: You should also check the benefits of term life insurance if you are planning to purchase the term insurance plan.
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+Rs. 487/month (Rs.16/day) is starting price for a 1 crore term life insurance for an 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 38 years of age.
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+Rs. 820/month is starting price for a 2 crore term life insurance for an (NRI) 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 38 years of age.
+Rs. 1,443/month is starting price for a 5 crore term life insurance for an (NRI) 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 38 years of age.
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