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Changes in Insurance Taxation

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Changes to tax laws have quietly crept onto your insurance policies. From October this year, the Income Tax Act empowers tax authorities to deduct 2% tax at source (TDS) on insurance policies. Of course, this is only for policies where the amount paid by the company exceeds Rs 1 lakh.


Those who are counting on insurance policy as part of their future financial planning need to take into account the tax changes that have come about and make amends accordingly.


Here are five things should know about the changes in insurance taxation:

1) Finance Bill 2014: The rule to tax insurance policies is part of the new Finance Bill of 2014. While the tax only became applicable from October, the change was set out in the New Finance Bill of 2014. A new section – 194DA – was inserted under the Section 194D of the Income Tax Act. This section makes it binding on insurance companies to deduct a 2% income tax at source (TDS) on all insurance policy payouts, where the payout exceeds Rs 1,00,000 during the financial year.


2) Exceptions: Some life insurance policy holders will heave a sigh of relief. The new rule is not applicable for insurance policies which are exempted from tax under Section 10 (10D). As per the IT Act's Section 10(10D), any amount received from a life insurance policy is exempted from tax as long as its premiums don't exceed either 10% or 5% of the sum insured. It is 10% for insurance policies bought after April 2012, and 5% for policies bought before April 2012. However, there is an exception to the exception. The section does not include any amounts received from an annuity or pension plan, an insurance policy for a disabled dependent, or employer-sponsored group life insurance schemes. If you own any one of these policies, then the amount you receive will be after a 2% tax is deducted.


3) Affected parties: Life insurance policies are designed by considering the age factor. Higher the age, more the associated risks and higher the premium charged for an equal sum assured. For example, a 46-year-old will pay a higher premium for the same sum assured than a 30-year-old. This means, the rule will affect the elderly more, as they would be paying a higher premium. If this is over the 10% threshold level, it will fall in the 2% TDS bracket. Secondly, all single premium policies where the premium normally breeches the 10% of sum assured limit would become liable for a 2% income tax at source charge. Be it maturity, survival or surrender of a life insurance policy, if the premium exceeds the 10% limit it would become liable for a TDS charge.


4) Death benefits excluded: An insurance policy lasts for a particular period of time. If the insured dies within this period, then an amount is paid to the family of the insured or whoever is the beneficiary. Otherwise, the insurance policy simply matures. During this time, the insurance company refunds the premiums paid. This amount is taxed; not the money that the company pays on the death of the insured. Other payouts taxed include partial withdrawal or surrender if it exceeds Rs 1 lakh. So, whatever the premium may be, the Income Tax Act exempts all amounts received in case of an insured dying during the term of the life insurance policy.


5) PAN card a must: Other than the new TDS applicable on some life insurance policies, the authorities have also made it mandatory for policy holders to provide PAN card details. Should one be unable to do so, the company is will charge a TDS of 20%, much higher than the 2% tax levied. This condition is likely to impact holders in the rural areas, where many are not even aware such a card.






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