In the Budget 2019, it has been proposed that from September 1, 2019, 5 per cent TDS on non exempt portion of life insurance pay-out will be charged on net basis.
In her first Budget, India’s first woman Finance Minister Nirmala Sitharaman announced that there will be a change in the rule and the rate of tax deducted at source (TDS) on the maturity amount, where the premium amount is more than 10 per cent of the sum assured (more than 20 per cent of sum assured (SA) for policies issued between April 1, 2003 and March 31, 2012).
In case of term plans, where premiums are much lower than 10 per cent of the SA, as well as for most of the regular premium endowment plans, the maturity amount is not taxable under the provision of sub-section 10D of section 10 of the Income Tax Act on the ground that the premium is less than the certain percentage of the SA.
But in case of single premium policies, the premium is generally much more than 10 or 20 per cent of the SA and hence the maturity amount becomes taxable as per section 194DA of the Act. Maturity proceeds, which contain SA and bonus, of some short-term regular premium plans also become taxable, where the amount of regular premium exceeds the allowed percentage of SA u/s 10(10D) of the Act.
So far, TDS of 1 per cent was deducted from the entire maturity amount (i.e. SA+Bonus or Loyalty Addition) in case of the policies, where the premium amount exceeded the stipulated percentage of SA.
However, in the Budget 2019, it has been proposed that from September 1, 2019, 5 per cent TDS on non exempt portion of life insurance pay-out will be charged on net basis (i.e. total maturity amount – total premium paid), instead of deducting tax from entire maturity amount.
While the net pay may be very low in come cases, resulting into lower tax outgo, but in most cases, especially for the popular single premium plans of LIC of India, the proposed tax outgo will be much higher than the existing 1 per cent TDS on the maturity amount.
Take for example the single premium option of plain vanilla endowment plan of LIC of India – Single Premium Endowment Plan (Table No. 817). The entry age under this plan varies from 90 days (completed) to 65 years (nearest birthday) and the term of the policy varies from 10 years to 20 years.
If the policy is taken for a child of 90 days for a term of 20 years, the amount of single premium for a policy of Rs 1 lakh SA will be Rs 52,440 and the maturity amount, taking into account the current Bonus rates, will be Rs 1,96,000.
So, as per current provision, the TDS amount will be 1 per cent of Rs 1,96,000 or Rs 1,960. But the proposed TDS amount will be 5 per cent of Rs 1,43,560 (i.e. Rs 1,96,000 – Rs 52,440) or Rs 7,178. Hence, under the proposed TDS rule, the tax payable will be about 3.66 times more in this case.
However, the difference will be less, in case a 65 years old person takes a policy for a term of 10 years. In this case the amount of single premium for a policy of Rs 1 lakh will be Rs 76,945 and the maturity amount, taking into account the current Bonus rates, will be Rs 1,41,000.
So, the existing TDS will be 1 per cent of Rs 1,41,000 or Rs 1,410, while the proposed TDS will be 5 per cent of Rs 64,055 or about Rs 3,203. Hence, under the proposed TDS rule, the tax outgo will be about 2.27 times more compared to the existing TDS amount.
As per sub-section 10D of section 10 of the Income Tax Act, TDS is levied in case of maturity claim and not in case of death claim.