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In a step that will help ease compliance hassles for life insurance policy holders, the Budget proposed a 5 per cent tax deducted at source (TDS) on net insurance proceeds. The provision will come into effect from September 1, 2019.
This means that for such policies, net insurance proceeds — which is the amount payable minus total premium paid — will be taxed at 5 per cent.
TDS is deducted at 1 per cent of gross proceeds at the time of payment, as per current norms.
At present, under section 194DA of the Income Tax Act, a person is obliged to deduct tax at source if the person pays any sum to a resident under a life insurance policy, which is not exempt under sub-section (10D) of section 10. “Several concerns have been expressed that deducting tax on gross amount creates difficulties to an assessee who otherwise has to pay tax on net income (that is after deducting the amount of insurance premium paid by him from the total sum received),” said the Memorandum to the Finance Bill, 2019, adding that it will also help tax administration easily match the TDS.
Riders attached
Insurers said the provision is for only specific covers, which are largely single premium as most policies have a 10-time cover and are so outside the ambit of tax.
“Most insurance policies don’t fall under the ambit of this tax provision because it only applies for those policies which are not exempt under section 10(10D), that is policies which do not have a minimum 10 times life cover. Even for policies which will attract this tax, the new proposal of 5 per cent TDS is possibly better as it is only applicable on the net gains (total payout less premiums paid). At present, one per cent TDS is levied on the total payout exceeding ₹1 lakh, so there could be situation where the customer ends up paying TDS even if s/he has not had any gains,” said Ashwin B, Chief Operating Officer, Exide Life Insurance.
Smoother IT filing
Satyan Jambunathan, Chief Financial Officer, ICICI Prudential Life Insurance, also welcomed the move and said it will facilitate smoother tax compliance for the customer.
“This is because generally customers mention only the net income in their income tax returns, whereas Form 26AS reflects the total proceeds on which tax has been deducted, thus leading to a mismatch. Going forward, such instances can be avoided,” he said.
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