TDS on Insurance payments at the time of maturity or surrender of policy

Life insurance not only gives you financial security but also helps to save tax. Life insurance premium paid during the financial year can be claimed as tax deduction up to a maximum limit of Rs. 1, 50,000 as specified in section 80C.

Insurance companies are required to deduct tax while paying maturity proceedings to policyholders. In this article, we will be discussing the TDS provisions as specified in section 194DA.

These companies are also required to deduct tax under section 194D from commission amount at the time of payment or credit whichever is earlier. To know more on this read our article TDS on insurance commission.

TDS on life insurance payments – Section 194DA

Insurance companies are required to deduct tax under section 194DA at the rate of 1% while paying any sum under a life insurance policy to a resident individual. TDS amount is also required to be deducted from the sum allocated by way of any bonus to the insurance policy.

If permanent account number is not quoted by the deductee, then rate of TDS is 20%.

To the above rates, surcharge, education cess or SHEC shall not be added. This means tax under section 194DA has to be deducted at the rate of 1% or 20% as the case may be .

TDS amount under section 194DA has to be deducted at the time of payment.

When tax not to be deducted U/s 194DA

Tax is not required to be deducted if payment or aggregate amount of payment does not exceed Rs. 1, 00,000.

TDS amount is also not required to be deducted if the sum received under a life insurance policy (LIP) is exempted under section 10(10D). This means if the maturity benefit of a LIP is not exempt under section 10 (10D), then the amount received from insurance companies is subject to tax deducted at source or TDS under section 194DA.

When life insurance payouts is exempted from tax – Section 10(10D)

Any sum received under your LIP including the sum allocated by way of bonus on such policy is exempted under section 10 (10D). However, following cases are subject to tax, if any sum is received;

  • from a policy under section 80DD(3) or 80DDA(3); or
  • under a Keyman insurance policy; or
  • under an insurance policy issued on or after 1-4-2013 but on or before 31-3-2012 in respect of which the premium payable for any of the years during the terms of the policy exceeds 20% of the actual capital sum assured;or
  • under an insurance policy issued on or after 1-4-2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 10% of actual capital sum assured; or
  • under an insurance policy issued on or after 1.4.2013 for insurance on the life of any person, who is
    • a person with disability or a person with severe disability as referred to in section 80U; or
    • suffering from disease or ailment as specified in the rules made under section 80DDB in respect of which the premium payable for any of the years during the terms of policy exceeds 15% of the act capital sum assured.

However if any amount is received on the death of the person, it will be exempted without any condition.

Submission of 15G or 15H for non deduction of tax

If aggregate amount of the payment in respect of LIP credited or paid or likely to be credited or paid during the previous year in which such income is to be included does not exceed the maximum amount which is not chargeable to tax, then a self declaration under form number 15G can be furnished to the deductor for non deduction of tax.

If the resident individual who is of the age of 60 years or more at any time during the previous year has produced a declaration in writing in form number 15H to the deductor, then tax shall not be deducted. Such person should state that tax on his estimated total income including the insurance payouts will be nil.

Please remember that in case of senior citizens, insurance payouts can be more than the basic exemption limit but if the tax liability including such receipts is nil, then form 15H can be produced to the deductor.

While producing form 15G or 15H, you need to mention your permanent account number. In absence of PAN, such declaration will be invalid and tax shall be deducted at the maximum marginal rate.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.