Latest amendments to Life insurance policies eligible for deduction U/s 80C of Income Tax Act, 1961 and TDS there on

Insurance policies are major source  tax saving Instruments for Individual and Hindu undivided Families, recently there are lot of changes have taken place including new TDS Section 194DA on Payments received under Life Insurance Policies introduced by Finance ACT ( NO 2 ) of 2014. An attempt has be made present the amendments in easily understandable way.

1)      Amendments to section 80C – Tax Effect on Life Insurance Policies:-

While claiming deduction U/s. 80C for Insurance Premium payments paid or deposited on life insurance policies, exemption amount is restricted as below on percentage of Capital Sum Assured:

For this purpose insurance policies are divided into two categories (for easy understanding purpose classified as) one being regular life insurance policies and second being Life insurance policies specified section 80U – Deduction in case of person with disability & 80DDB – Deduction in respect of medical treatment

For regular Life Insurance Policies (other than contract for deferred annuity)

Issued from 01.04.2012 – premium paid not in excess of 10% of Capital Sum Assured (as amended by Finance Act 2012.

Issued from 01.04.2003 and on or before 31.03.2012 – premium paid not in excess of 20% of Capital Sum Assured

And

for other Life Insurance Policies issued in lieu of Sec. 80U (person with disability as specified) & Sec. 80DDB (suffering from diseases and ailments) issued on or after 01.04.2013  – premium paid not in excess of 15% of Capital Sum Assured as amended by Finance Act 2013.

Actual capital sum assured is defined as (Explanation given under 80C (3A))

The minimum amount assured under the policy on happening of the insured event at any time during the term of the policy, not taking into account—

(i) the value of any premium agreed to be returned; or

(ii) any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may be received under the policy by any person.

Therefore deduction U/s 80C is restricted to 10% or 15% as the case may be of the capital sum assured.

It is to be noted that if where the assessee terminates his contract with insurance company by reason of failure to pay any premium

·         In case of single premium policy within two years after the date of commencement of insurance or

·         In any other case, before premiums have been paid for two years

·         In case of ULIPS 80C(2)(x) or (xi) within five years

The aggregate of amount of deduction so claimed will be treated as income in such previous year and shall be liable to tax.

2)       TDS on Payment received on Life Insurance policy U/s 194DA [Inserted by the Finance (No. 2) Act, 2014, w.e.f. 1-10-2014.]

Section reproduced below

”194DA. Any person responsible for paying to a resident any sum under a life insurance policy, including the sum allocated by way of bonus on such policy, other than the amount not includible in the total income under clause (10D) of section 10, shall, at the time of payment thereof, deduct income-tax thereon at the rate of two per cent:

Provided that no deduction under this section shall be made where the amount of such payment or, as the case may be, the aggregate amount of such payments to the payee during the financial year is less than one hundred thousand rupees.”

Summarizing the section

·         Rate of TDS : 2%

·         No Pan cases – TDS rate is 20%

·         TDS is deductable where aggregate payment during the financial year exceeds Rupees one Lakh

·         Annuities received ie., pension plan are not covered u/s10(10D)  therefore liable for TDS subject to limit specified ie., Rupees One Lakh

·         Terminated Life Insurance contracts subject to limit specified ie., Rupees One Lakh

Exemption :

·         Aggregate payment does not exceed one lakh rupees during the Financial Year

·         Policies issued satisfying section 10(10D) and amount received on death of the person other than  Keyman insurance policy and U/s  80DD(3) or U/s. 80DDA(3)

·         Any sum received U/s  80DD(3) or U/s. 80DDA(3)

·         Any sum received under a Keyman insurance policy