The Budget 2014-15 says that you have to pay a 2% TDS on any sum you receive from most of your life insurance policies.
If you think that the maturity or bonus benefits that you get from your insurance policies are tax-exempt, it is high time to learn that all policies do not enjoy this advantage.
If till date you have not paid taxes on these sums, it was for the reason that the sums you received till date did not attract tax. But as per the new budget the Government will deduct 2% tax at source from the amount you receive from your insurance policies.
The new provisions:
In the Budget 2014-15, the Government of India has introduced a new provision relating to levy of income tax on life insurance policies.
The new provision states that life insurance policies which do not qualify for income tax exemption as per Section 10 (10D) of the Income Tax Act will attract 2% TDS on the sum paid to the policyholder.
All life policies are not tax-exempt. People knowingly evade income tax on the TDS as it is difficult for the department to find out the nature of the policy and its taxability during an assessment.
The onus is upon the insurer who is liable to deduct TDS on all policies in case the maturity proceeds are taxable. Moreover the Insurance policy receipts which do not qualify for tax exemption under Section 10 (10D) will be taxed normally by the department.
The sum paid by an assessee towards the premium of insurance policies can be deducted from his total income for the year to find out his taxable income. The proceeds on maturity or upon surrender of the policy are tax-exempt under Section 10 (10D) of the Act which means that they are tax-free income.
How to qualify for tax exemption?
To qualify for tax benefits on insurance policies, the premium paid should not exceed 10% of the sum assured under the policy if such policy is issued after 1.4.2012. If such policy issued before 1.4.2012, the premium should not be more than 20% of the sum assured.
If the premium is more than the above limit, one shall not be entitled to avail the exemption to the extent it exceeds the limit. A premium equivalent to 10% of sum assured under an insurance policy will be eligible for tax deduction as per Section 80C of the Act and one cannot claim tax exemption under Section 10 (10D).
Tax on pension policies:
People often have the wrong concept that pension policies are qualified for tax exemption. In pension policies though the commuted amount is tax exempt, the annuities received by the policy holders are taxable.
People, who have escaped tax on income from insurance policies till date, have no other option than to pay tax under this new provision.