Tax Benefit and TDS on Life Insurance
We are at the end of Financial year and all life insurance companies have launched some new plans to cash in the last minute tax saving frenzy.
But do you know that some of life insurance policies might not give you the desired tax benefit both at the time of investment and also at the time of maturity.
Eligibility for Life Insurance policy to get Tax Benefit?
The tax benefits for Life Insurance are at two stages:
- While investing. the investment is exempted up to Rs 1.5 Lakhs as part of section 80C
- At the time of maturity. the maturity amount paid to the survivor u/s 10(10D) is tax free
But Budget 2012 put on following conditions for Life Insurance policies to qualify for the above tax benefits:
- Only insurance policies which have sum assured of more than 10 times the annual premium paid would be eligible for Tax Benefit u/s 10(10D) at the time of maturity payment.
- At the time of investment the tax benefit would be limited to minimum of (annual premium paid, 10% of Sum Assured, Rs 1,50,000) u/s 80C.
This change is for all Life Insurance Policies bought after March 31, 2012.
As a special case for life insurance of the disabled and those suffering from ailments, the annual premium can be less than 15% of the sum assured – i.e. – Sum assured should be greater than 6.67 times the annual premium. This change was made in Budget 2013 .
Also Budget 2014 has mandated 2% 1% (effective June 1, 2016 ) TDS on the amount payable at maturity under Section 194DA for all payments greater than Rs 1 lakh. So this taxation is getting stricter and trackable.
Budget 2015 has introduced the facility to fill Form 15G/15H in case your annual income is less than the minimum taxable limit and you don t want TDS deducted on Life Insurance maturity payment. This would be effective from June 1, 2015.
The above changes in tax laws applies to all kind of Life Insurance Policies, be it ULIP, Endowment Plan or Return of Premium Plans.
In case the Life Insurance does not qualify for tax benefit as above u/s 10(10D), the income received at the time of maturity on survival would be added to your income and taxed to your marginal tax rate.
You need not worry about the Term Insurance as the Sum Assured is always more than 10 times the annual premium paid. But if you are investing in ULIPs, Endowment Plan or Return of Premium Plans you need to do a thorough check.
There might also be cases where a Life Insurance policy can be Tax Free for only a selected group of investors.
Take example of HDFC Standard Life Insurance online ULIP HDFC Click2Invest . In this case the investors opting for Single Premium would not get tax benefit u/s 10(10D) as the sum assured is only 1.25X of annual premium paid.
Also investors with age more than 55 years would not get any tax benefit at the time of maturity as the sum assured is only 7X of annual premium paid.
However they would get limited tax benefit u/s 80C using the following formula: minimum of (annual premium paid, 10% of Sum Assured, Rs 1,50,000)
Only investors opting for regular premium payment and aged less than 55 years would get full tax benefit both at the time of investment and at the time of maturity.
Do check and recheck before investing in these plans!
Remember Life Insurance should be an “expense” to cover the risk of your life and never an “Investment”.