Income Tax

Rules for Tax Calculation from Life Insurance under Sec 194DA

Let us commit that one way or the other we all have got life Insurance policies just not only for the insurance coverage but with a motive of getting a good amount as returns. According to tax calculations under Section 194DA, it allows the insurance company to deduct TDS if the ratio of minimum 1:10 is not maintained between annual premium and the net sum assured.

Background- Why Income Tax discouraging Single Premium Policies?

The main policies getting affected are the Single premium Policies as most of them have more than 100% to 7005 as the Sum Assured.  The TDS varies with the availability of PAN card. It is 1% (effective from 01-06-2016) if the PAN card is available and 20% in case of non-availability. The traditional Single Premium policies were designed in such a way so as to yield profits except for the ULIP single premium policies which are well known for their negative returns.

In case your insurance policy cover meets the requirements section 10D, then no TDS will be deducted. Also, TDS is exempted in case the amount is received on death by the legal heirs.

single premium policy- its implications on income tax
single premium policy- its implications on income tax

Calculate Taxable Returns in case of Profits from Life Insurance

Make sure that you claim your TDS benefit. As the TDS has already been deducted by the insurance company before paying you the final amount on maturity, so make the necessary adjustments while paying your Income tax.

Calculate Taxable Returns in case of losses from Life Insurance

According to circular No. 7/2003 dated on September 5, 2003 under Finance Act 2003 states that there is a tax on income from life insurance policies which is accrued and not include the premium already paid by the person.

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So in case you have faced losses from your investments which is the sum which you get on maturity of life insurance is less than the premium paid, the assessee is not liable to pay the tax as the amount you invested has already been taxed in your tax.

Customizing the Calculations of Taxable Returns

Nonexemption while tax calculations under Sec 194DA

  1. In case the insurance premium is greater than 10%, 15% or 20%
  2. Assures sum received under Keyman policy
  3. Sum received under section 80DD (sub-section 3) and 80 DDA (section 3)

In case the amount paid is 1,00,000 or more, the insurance company will deduct a TDS @ 10%.

Assumptions made while performing the above calculations:

  • The tax slab assumed is 30%.
  • The taxes/TDS in the picture shown are the basic taxes and do not include surcharges. Please make the necessary changes.

I hope this article gave you some clear picture about tax calculations under section 194DA. In case of any doubts please feel free to leave your comments below.



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