TDS Payment as per life Insurance Policy

According to current arrangements, any payment in regard to life insurance policy to a resident individual will be liable to TDS at the rate of 1% under Section 194DA. The tax will be deducted under this arrangement at the time of payment, if total payable amount surpasses Rs. 1 lakh. Tax isn’t required to be deducted if amount payable under an insurance policy is absolved from tax under Section 10(10D) or the sum is received on the event of death of the insured person.

A correction has been proposed under this segment as tax payers were confronting hardships because of cut of tax from the gross sum though they were liable to pay tax only on net income. Usually, in Chapter XVII tax is required to be deducted on the amount paid or payable and not on the income segment with the exception in Section 192 and Section 195. The Finance Bill has proposed a change to Section 194DA which requires the deductor to deduct tax just on the income com-ponent involved in the insurance pay-out. This amendment has been proposed so the income according to TDS return of the deductor can be coordinated naturally with the return of  income filed by the assessee. The tax will be deducted at the rate of 5% processed on the income section (rather than 1% on the gross amount).

The arrangements of Section 194DA does not recommend any mechanism for calculation of taxable in-come if there should be an insurance proceeds. At the point when an insurer takes the insurance policy, he gets the privilege to get sum due against his insurance policy either on maturity or on its surrender. So, right to get sum from insurance policy is a capital asset inside the significance of segment 2(14) and any income or losses emerging on its exchange will be chargeable to tax under the head ‘Capital Gains’. If an insurance policy has been held for over three years, it will be considered as long term capital assets, accordingly the advantage of cost increased file will be given while calculating the amount of capital gains.

Example, In Financial Year 2013-14, Mr A purchases an insurance policy of Rs. 50 lakhs (for a term of 20 years) by paying the premium of Rs. 10 lakhs. He gives up the policy for Rs. 15 lakhs on 01-10-2019. Before the Finance Bill, 2019, the payer insurance co. was required to deduct tax at the rate of 1% on total sum paid (i.e., Rs. 15 lakhs) to Mr. A. However, after the proposed revision, tax will be deducted at the rate of 5% on the overall gain and not on the gross amount paid to insured (Mr A).

So, the insurance agency will be required to calculate the taxable amount in hands of Mr. A. For this situation, long term capital gains will emerge in the hands of Mr. A as time of holding is over three years. How about we accept the cost inflation index for the financial year 2019-20 is 289, the indexed cost of obtaining of such insurance policy will be Rs. 13,13,636 lakhs (Rs. 10 lakhs * 289 (CII for FY 2019-20)/220 (CII for FY 2013-14). So, the long term capital gains in such case will be Rs. 1,86,364 lakhs (for example Rs. 15,00,000 less Rs. 13,13,636 lakhs). Insurance agency will deduct tax under Section 194DA at the rate of 5% on the taxable income only– Rs. 9,318 (5% of Rs. 1,86,364 lakhs).

As section 194DA does not endorse any mechanism for calculation of Income, the income from surrender or maturity of insurance policy will be registered in the way as exhibited previously.

Enquire with Certicom Consulting in case of any queries.