The general impression of people that life insurance policies are tax-free is set to change.
In a blow to policyholders of life insurance policies, the government has proposed to levy 5% tax deducted at source (TDS) from maturity proceeds of life insurance policies.
Currently, under Section 10 (10D) of the Income Tax Act, insurers deduct 1% TDS on maturity proceeds of life insurance policies if the premium paid is more than 10% of the sum assured. Further, if policyholders do not provide PAN card to insurers, it attracts a TDS of 20%.
While policyholders can claim credit for the TDS deducted in income tax return, they will have to pay taxes on the entire proceeds if their policy does not meet these criteria
- If annual premium exceeds 20% of the total sum-assured for insurance policies issued between April 1, 2003 and March 31, 2012
- If the annual premium exceeds 10% of the total sum assured on policies issued after April 1, 2012
- If the annual premium exceeds 15% of the sum assured on policies issued after April 1, 2013 to differently able insured
In the fine print of the finance bill of Budget 2019, the government said, “It is proposed to amend the said section so as to provide that the levy of tax deduction at source shall be on the income comprised in the sum payable by way of redemption of a life insurance policy, including the sum allocated by way of bonus on such life insurance policy, excluding the amount exempted under the said clause (10D) of section 10 at the increased rate of five per cent.”
Further, the government would also deduct TDS on bonus payments.
However, there will be no TDS on maturity proceeds arising out of death of a policyholder or if it is less than Rs. 1 lakh.
Insurance experts feel that there is no justification for charging TDS on maturity proceeds only in life insurance policies and IRDAI should seek parity with other financial products.
