Importance of TDS on life insurance policy

Introduction

Life insurance policies are designed to offer financial protection to the policyholder’s dependents in the event of their unexpected death. While buying life insurance, one must consider the premiums to be paid and the returns they will receive from the policy. However, there are certain tax implications of life insurance policies that policyholders should be aware of, such as TDS. Tax Deducted at Source is a tax levied by the government on the income earned by individuals, including the returns from their life insurance policies. In this article, we will discuss the importance of  TDS on life insurance policies and the exemptions from TDS on life insurance policies in detail.

What is TDS on Life Insurance Policies?

TDS (Tax Deducted at Source) on life insurance policies is the tax that is deducted by the insurance company at the time of payout of the maturity amount or death benefit. As per the Income Tax Act, 1961, if the policyholder receives more than Rs. 1 lakh as maturity amount or death benefit, then the insurance company is liable to deduct TDS at the rate of 1% on the amount paid. It is important to note that Tax Deducted at Source is only applicable to the sum received by the policyholder, and not to the premium paid.

Exemptions from TDS on Life Insurance Policies

There are certain exemptions from Tax Deducted at Source on life insurance policies. If the policyholder is a non-resident Indian (NRI) and has purchased the policy during their stay in India, then they are not liable to pay Tax deducted at Source on the maturity amount or death benefit received. Additionally, if the policyholder submits Form 15G or 15H to the insurance company, then TDS will not be deducted. Form 15G and 15H are self-declaration forms which state that the policyholder’s income is below the taxable limit and they are not liable to pay the Tax Deducted at Source.

Importance of TDS on Life Insurance Policies

The importance of TDS on life insurance policies is considered for policyholders as it helps them understand their tax liability. If the policyholder is not aware of the Tax Deducted at Source, they might end up paying more tax than required. Additionally, it is important for policyholders to keep a record of the TDS deducted by the insurance company as it can be claimed as a tax credit while filing income tax returns.

TDS on Partial Withdrawals from Life Insurance Policies

If the policyholder opts for a partial withdrawal from their life insurance policy, Tax Deducted at Source will be applicable only if the amount withdrawn exceeds Rs. 1 lakh. In such cases, the insurance company will deduct TDS at the rate of 1% of the amount withdrawn.

TDS on Surrender Value of Life Insurance Policies

If the policyholder surrenders their life insurance policy before its last date, then the insurance company will pay them the surrender value, which is the amount that the policyholder will receive after deducting the applicable charges. In such cases, Tax Deducted at Source will be applicable if the surrender value exceeds Rs. 1 lakh. The insurance company will deduct TDS at the rate of 1% on the amount exceeding Rs. 1 lakh.

TDS on Death Benefits from Life Insurance Policies

If the policyholder passes away during the policy term, their dependents will receive the death benefit from the insurance company. In such cases, Tax Deducted at Source will be applicable if the death benefit exceeds Rs. 1 lakh. The insurance company will deduct TDS at the rate of 1% on the amount exceeding Rs. 1 lakh.

How to Avoid TDS on Life Insurance Policies?

Policyholders can avoid Tax Deducted at Source on their life insurance policies by submitting Form 15G or 15H to the insurance company. However, to submit these forms, the policyholder must meet certain conditions. Form 15G is applicable to individuals who are below the age of 60 years and have an estimated taxable income for the financial year that is below the minimum taxable limit. On the other hand, Form 15H is applicable to senior citizens who are above the age of 60 years and have an estimated taxable income for the financial year that is below the minimum taxable limit.

Conclusion

Tax Deducted at Source on life insurance policies is a tax levied by the government on the returns received by the policyholder. The insurance company deducts the Tax Deducted at Source at the rate of 1% on the maturity amount or death benefit paid if it exceeds Rs. 1 lakh. There are certain exemptions from TDS on life insurance policies. However, NRIs and policyholders who submit Form 15G or 15H are exempted from paying the Tax Deducted at the source. It is important to note that TDS is deducted only on the returns received and not on the premium paid. Therefore, it is advisable to consult a tax expert to understand the importance of tax implications of life insurance policies before investing in them.