I took a single premium insurance policy, paying a premium of one lakh rupees on April 4, 2012. The policy, which matures next year in April 2022, gives an insurance coverage (sum assured) of ₹109,450. Due to medical exigencies, I intend to surrender this policy prematurely, and I will get an amount of around ₹235,000. Am I required to pay tax on the excess amount of ₹135,000? The rule regarding insurance coverage being at least 10 times the premium paid, came into vogue only in September 2012, and hence in my view, is not applicable to this policy. What's your view on this? The insurance company is likely to deduct 5 per cent as TDS. Will the situation regarding tax, change if I allow the policy to run its course till next year?

A.R. Ramanarayanan

Maturity proceeds arising from insurance policies that are issued on or after April 1, 2012 are exempt from taxation provided premium paid does not exceed 10 per cent of the sum assured. In your case considering the fact that premium paid is more than 10 per cent of the sum assured, the maturity amount received shall be taxable in your hands. The insurance company would deduct 5 per cent taxes on the net proceeds i.e. on ₹135,000 as per section 194DA of the Act. Even if you allow the policy to run till next year, the maturity proceeds would be taxable in your hands as the same do not satisfy the conditions laid out under section 10(10D) of the Act as clarified above.

The writer is Partner, Deloitte India

Send your queries to taxtalk@thehindu.co.in

comment COMMENT NOW