Tax on survival benefits

If your policy is maturing after October 1, the insurer will deduct a tax at source (TDS) of two per cent from the proceeds of your life insurance policy for both unit-linked insurance plans and traditional plans. The taxation will be on the entire sum, including the sum allocated by way of bonus, provided the premium paid towards the policy is more than 10 per cent of the sum assured.

Currently, under Section 10(10D) of the Income Tax (I-T) Act, any sum received from a life insurer is not taxable if the premium payable is up to 10 per cent of the sum assured. Tax would be payable as on your applicable slab if the premium exceeded the 10 per cent amount. However, since there was no TDS, several assessees avoided the tax. This TDS will, however, not apply if the amount is less than Rs 1 lakh. What this means is that if your sum assured is less than 10 times the annual premium, you will need to pay a tax on the maturity proceeds. But the death benefit in this case will continue to be tax free.

The Finance Bill, 2014, states, "To have a mechanism for reporting of transactions and collection of tax in respect of sum paid under life insurance policies which are not exempted under Section 10(10D) of the I-T Act, it is proposed to insert a new section in the Act to provide for deduction of tax at the rate of two per cent on sum paid under a life insurance policy, including the sum allocated by way of bonus, which are not exempt under section 10(10D) of the Act." It has also been proposed that no deduction under this provision shall be made if the aggregate sum paid in a financial year to an assessee is less than Rs 1 lakh. In 2012-2013 the threshold of premium payable was reduced to 10 per cent of the actual capital sum assured, from 20 per cent earlier.