INCOME TAX ON MATURITY AMOUNT OF LIFE INSURANCE POLICY

0 0 RAJ KUMARI Tuesday, April 30, 2019 Edit this post

There is a lot of confusion among the Taxpayers and tax professionals regarding taxability of the Maturity amount received from Life insurance company specially on policies on which life insurance company has deducted tax at source @1 % on the amount paid under section 194DA and amount received by the assessee has been shown in Form 26AS of the person.

I have read above question in Economics Times , where expert has answered that full amount is taxable in the hands of the Taxpayers without deduction of premium amount which is already considered in the income of the respective years means clear cut case of double taxation. So I have decided to study the matter in detail and brought out and share the Logical Truth to all readers.

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Exemption on Life insurance policy Maturity receipt under Income Tax

Relevant Section 10(10D):

Tax Exemption on Maturity Amount of Life Insurance Policy has been covered under Section 10(10D). All the possible scenarios have been covered under the table given below.

Explanation to table above:

First of all check sr no 1 and 2 if your case falls under any of the first two then other condition are not applicable ,however if these two are not applicable then rest of the conditions is to be checked.

1. Under the provisions of section 10(10D) of the Income-tax Act, 1961Death claims proceeds of life insurance policy, including the sum allocated by way of bonus on such policy is exempted from income-tax.

2. Under the provisions of section 10(10D) of the Income-tax Act, 1961 Maturity proceeds of life insurance policy, including the sum allocated by way of bonus on such policy is exempted from income-tax if life insurance policy is issued before 01.04.2003

3&3A. Any sum (not including the premium paid by the assessee) received under an insurance policy issued on or after the 1st day of April, 2003 to 31.03.2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 20% of the actual capital sum assured is taxable under income tax act. However, where the premium is up to 20 % of the sum assured then maturity amount is exempted

4&4A. Any sum (not including the premium paid by the assessee) received under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 10% of the actual capital sum assured will no longer be exempted under this section. However, where the premium is up to 10 % of the sum assured then maturity amount is exempted,However in case of person is disable as per section 80U or suffering from disease or ailment as per section 80DDB and policy is on or after 01.04.2013 then 10 limit will be increased to 15% of sum assured is allowed.

5. Maturity amount received in Key Man Insurance Policy and amount to be refunded under Section 80DD Insurance Plan in case of handicapped dependent predeceases the individual, is also not exempted under this section.

From the above it is clear that in Case -3 and Case-5 the maturity amount is not exempted under Section 10(10D) and liable to Income Tax.

Example

On 8-4-2012, Mr. Raja takes a life insurance policy. Sum assured is Rs. 25,00,000 and annual premium is Rs. 84,000. The policy will mature in 2028. Maturity value will be Rs. 18,00,000. Advise him regarding the tax treatment of amount to be received from above policy.

In this case policy is taken after 1-4-2012 and, hence, tax treatment will be as follows:

Nothing will be charged to tax in respect of amount received on death of Mr. Raja.
In any other case, the amount received from policy will be exempt, if the annual premium of any financial year does not exceed 10% of the capital sum assured. The capital sum assured in this case is Rs. 25,00,000 and 10% of Rs. 25,00,000 works out to be Rs. 2,50,000. The annual premium of the policy is only Rs. 84,000. Hence, nothing will be taxed on account of amount received otherwise than on death also.

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Introduction of Section 194DA TDS on Life insurance maturity

Finance Act 2014(2) introduce following section

Payment in respect of life insurance policy.

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 [one] 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.

In above section(Bold part), TDS is deductible by insurance company only if section 10(10D) is not applicable on such payment , so is it clear from section 194DA that TDS is deductible only on payment made for policies which are not covered under 10(10D) and not on all policy receipt.Means deduction of tax under 194DA,itself is a clear cut confirmation that the receipt from the policy in the subject matter is not eligible for deduction under section 10(10D)

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Whether Full amount of receipt from Such Policies is Taxable ?

Some of the tax professionals(example of ET given above) is of the view that Policies having sum assured less than prescribed limit is not only disqualify for exemption under section 10(10D) but also full amount received from insurance policy is taxable in the hands of assessee being the tax has been deducted on full amount and shown in form 26AS of the Taxpayer.

To refute their claim please go through in the Explanatory Memorandum given alongwith introduction of the new clause 194DA , which is reproduced as under

Under the existing provisions of section 10(10D) of the Act, any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy is exempt subject to fulfillment of conditions specified under the said section. Therefore, the sum received under a life insurance policy which does not fulfill the conditions specified under section 10(10D) are taxable under the provisions of the Act. In order 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 Act, it is proposed to insert a new section in the Act to provide for deduction of tax at the rate of 2 per cent(reduced to 1% later) 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. In order to reduce the compliance burden on the small tax payers, 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.1,00,000/-. This amendment will take effect from 1st October, 2014.

So introduction of 194DA has been done only to create a mechanism for reporting of transactions to income tax department and does not itself confirms that full amount is taxable under income tax. There are many similar section where under Income tax is deductible on full amount of payment but Income can declared as per actual by the assessee like Payment made to contractor under section 194C.So mere deduction of tax at source on full amount does not itself concludes or confirms that such amount is fully taxable.

So it can be concluded that the TDS @1 % under section 194DA has been introduced only "In order to have a mechanism for reporting of transactions"

From above following can be concluded

That Receipt from the Life insurance policies are taxable in few cases(where 10(10D) not applicable),however in case of death exemption is available in all cases.
Policies ,where investment is in large amount and insurance is minimal (Sum assured is less than 5/10 times of the insurance premium payable annually),tax exemption is not available.
That TDS under section 194DA is deductible only on policies where exemption is not available.

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What amount is taxable then out of total Maturity amount received from insurance company, if tax is deducted under 194DA

Now question comes in our mind ,whether full amount is taxable in such cases or part of the amount is taxable .To answer this question we have to check ,what was the motive behind the introduction of exceptions in exemption under section 10(10D). The Limit of 20% was introduced first in 2003-04 as depicted in Table above wef 01.04.2003.

Explanatory notes to this amendment in Finance bill 2003 is reproduced as under.(Memorandum To clause 6 and 41 In Finance Bill 2003-04)

Rationalization of the tax concessions in respect of insurance policies having the amount of premium more than twenty per cent of the actual capital sum assured

Under the existing provisions contained in clause (10D) of section 10, any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, (other than any sum received under a policy for the medical treatment, training and rehabilitation of a handicapped dependant under section 80DDA or any sum received under a keyman insurance policy), is exempt.
Under the existing provisions of section 88, a deduction from the income tax payable is allowed to an individual or a Hindu undivided family (HUF), in respect of any sums paid or deposited in PPF, GPF, NSC, insurance premia, etc. The deduction is allowed at specified percentage of such sums.
The insurance policies with high premium and minimum risk cover are similar to deposits or bonds. With a view to ensure that such insurance policies are treated at par with other investment schemes, it is proposed to rationalise the tax concessions available to such policies. It is therefore, proposed to substitute the clause (10D) of section 10, so as to provide that the exemption available under the said clause shall not be allowed on any sum received under an insurance policy in respect of which the premium paid in any of the years during the term of the policy, exceeds twenty per cent. of the actual capital sum assured. However, any sum received under such policy on the death of a person shall continue to be exempt.
It is also proposed to clarify that the value of any premiums agreed to be returned or of 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, shall not be taken into account for the purpose of calculating the actual capital sum assured under this clause.
The new provision also provides that the amounts received under sub-section (3) of section 80DD, shall not be exempt under this clause.It is also proposed to insert a new sub-section (2A) in section 88 which seeks to provide that the deduction in respect of the sums paid or deposited as premium under an insurance policy shall be available only on so much of the premium or other payment made on an insurance policy, other than a contract for a deferred annuity, as is not in excess of twenty per cent. of the actual sum assured.
It is also proposed to clarify that the value of any premiums agreed to be returned or of 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, shall not be taken into account for the purpose of calculating the actual capital sum assured under this clause.
The proposed amendment will take effect from 1st April, 2004 and will, accordingly, apply in relation to the assessment year 2004-2005 and subsequent years.

Relevant conclusions from explanatory notes is as under.

That Lawmakers has of the views that The insurance policies with high premium and minimum risk cover are similar to "deposits "or "bonds". so exemption on such policies should not be continued.
The new provisions has been issued With a view to ensure that such insurance policies are treated at par with other investment schemes and no undue favouritism be given insurance companies by giving tax exemption of pure investment product with minimal insurance and creating a level playing field for all investment product like fixed deposit in Banks and other debt products.
However In case of Death, Amount received remains exempted ,irrespective to the ratio premium paid and sum assured

In brief it can be concluded that even after withdrawal of exemption from such insurance policies (where premium is high and risk is minimum ) the tax treatment under income tax for such policies shall be similar to "deposits" and Bonds. And these amendment has been made to ensure that this policies are treated at par with other Investment scheme under Income tax point of view.

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Now if we treat these type of policies with "Deposit"

In above scenario to calculate the income, premium paid to insurance company must be deducted from amount received and these will shown as income under "Income from other source"

Calculation of Income in Amount received from Insurance company On which TDS has been deducted by the Insurance company

Amount Received from Insurance Company : 495000

TDS deducted : 5000

Gross Amount : 500000

Less :Premium Paid : 400000

Income from other Source : 100000

Further in support of our versions one may also refer Explanatory notes to finance act 2003 issued vide circular no 7/2003 dated 05/09/2003, where it has been clearly mentioned that "In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable "

So it has been clearly mentioned in above circular that income from such policies excluding the premiums paid by the assessee is taxable in hand of assessee.

Relevant text of the circular reproduced hereunder.

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Finance Act, 2003 - Explanatory Notes on provisions relating to Direct Taxes Circular 7/2003 05/09/2003

10.3 The insurance policies with high premium and minimum risk covers are similar to deposits or bonds. With a view to ensure that such insurance policies are treated at par with other investment schemes, amendments have been made in section 88 and clause (10D) of section 10. The existing clause (10D) of section 10 has been substituted so as to provide that the exemption available under the said clause shall not be allowed on any sum received under an insurance policy issued on or after the 1st day of April, 2003, in respect of which the premium payable in any of the years during the term of the policy, exceeds twenty per cent of the actual capital sum assured. In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable. However, any sum received under such policy on the death of a person shall continue to remain exempt. The new provision also provides that the amounts received under sub-section (3) of section 80DD, shall not be exempt under this clause.

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Tax treatment of amount received from life insurance policy (Summary)

Any amount received under a life insurance policy, including bonus is exempt from tax under section 10(10D). However, following points should be noted in this regard:

Exemption is available only in respect of amount received from life insurance policy.
Exemption under section 10(10D) is unconditionally available in respect of sum received for a policy which is issued on or before March 31st, 2003,

however, in respect of policies issued on or after April 1st, 2003, the exemption is available only if the amount of premium paid on such policy in any financial year does not exceed 20% (10% in respect of policy taken on or after April 1st , 2012) of the actual capital sum assured.

It should be noted that amount received on death of the person will continue to be exempt without any condition.
Value of premium agreed to be returned or of any benefit by way of bonus (or otherwise), over and above the sum actually assured, which is received under the policy by any person, shall not be taken into account while calculating the actual capital sum assured.
In case of maturity amount received under Insurance policies where the annual premium payable is more than 20%/10% and TDS has been deducted at 1%, the taxable income will be treated equal to Gross Amount received minus premiums paid .

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Answer to question asked in Economic Times

On the basis of above discussion , the taxable amount in above case will be 130000-80000=Rs 50000 only and not full amount of Rs 130000/- as shown in form 26AS and it is to be shown as income from other source in income tax return and normal slab rates shall applicable on such Income.

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Open questions ????

What if we treat such life insurance policies at par with Bonds , whether the receipts from such policies will be treated as capital gain ? whether indexation will be allowed at par with the Bonds ?such open questions remains in our minds.We have given our views on the Subject matter on the basis of factual position discussed and brought out as above,however a clarification from department may makes the things crystal clear.

Update : [Our view has be confirmed by Finance Minister in budget-2019 on 05/07/2019].Where it has clarified that taxable amount in maturity amount of insurance receipt is required to be calculated after deduction from premium paid from total amount received.

Full text of Relevant sections

Payment in respect of life insurance policy.

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 [one] 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.

Section 10(10D) any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than—

(a) any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA; or

(b) any sum received under a Keyman insurance policy; or

(c) any sum received under an insurance policy issued on or after the 1st day of April, 2003 but on or before the 31st day of March, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured; or

(d) any sum received under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured:

Provided that the provisions of sub-clauses (c) and (d) shall not apply to any sum received on the death of a person:

Provided further that for the purpose of calculating the actual capital sum assured under sub-clause (c), effect shall be given to the Explanation to sub-section (3) of section 80C or the Explanation to sub-section (2A) of section 88, as the case may be :

Provided also that where the policy, issued on or after the 1st day of April, 2013, is for insurance on life of any person, who is—

(i) a person with disability or a person with severe disability as referred to in section 80U; or

(ii) suffering from disease or ailment as specified in the rules made under section 80DDB,

the provisions of this sub-clause shall have effect as if for the words "ten per cent", the words "fifteen per cent" had been substituted.

Explanation 1.—For the purposes of this clause, "Keyman insurance policy" means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration;

Explanation 2.—For the purposes of sub-clause (d), the expression "actual capital sum assured" shall have the meaning assigned to it in the Explanation to sub-section (3A) of section 80C;