Payment in respect of life insurance policy [Section 194DA] under Deduction of Tax at Source :
(1) Under section 10(10D), 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.
(2) Consequently, the sum received under a life insurance policy which does not fulfill the conditions specified under section 10(10D) is taxable.
(3) For ensuring a proper mechanism for reporting of transactions and collection of tax in respect of sum paid under life insurance policies which are not exempt under section 10(10D), new section 194DA has been inserted to provide for deduction of tax at the rate of 2% [ wef from 1st June 2016 – rate has been decreased to 1% (FY 2016-2017 / AY 2017-2018 )] on any sum paid to a resident under a life insurance policy, including the sum allocated by way of bonus, which are not exempt under section 10(10D) .
(4) However, tax deduction is required only if the payment or aggregate payment in a financial year to an assessee is Rs 1,00,000 or more. This is for alleviating the compliance burden on the small tax payers.
Illustration
Examine the applicability of the provisions for tax deduction at source under section 194DA in the above cases –
(i) Mr.X, a resident, is due to receive Rs 4.50 lakhs on 31.3.2016, towards maturity proceeds of LIC policy taken on 1.4.2013, for which the sum assured is Rs 4 lakhs and the annual premium is Rs 1,25,000.
(ii) Mr.Y, a resident, is due to receive Rs 2.20 lakhs on 31.3.2016 on LIC policy taken on 1.4.2011, for which the sum assured is Rs 2 lakhs and the annual premium is Rs 35,000.
(iii) Mr.Z, a resident, is due to receive Rs 95,000 on 1.10.2015 towards maturity proceeds of LIC policy taken on 1.10.2011 for which the sum assured is Rs 90,000 and the annual premium was Rs 19,000.
Answer
(i) Since the annual premium exceeds 10% of sum assured in respect of a policy taken on 1.4.2012, the maturity proceeds of Rs 4.50 lakhs are not exempt under section 10(10D) in the hands of Mr.X. Therefore, tax is required to be deducted@2% under section 194DA on the maturity proceeds of Rs 4.50 lakhs payable to Mr.X.
(ii) Since the annual premium is less than 20% of sum assured in respect of a policy taken before 1.4.2012, the sum of Rs 2.20 lakhs due to Mr.Y would be exempt under section 10(10D) in his hands. Hence, no tax is required to be deducted at source under section 194DA on such sum payable to Mr.Y.
(iii) Even though the annual premium exceeds 20% of sum assured in respect of a policy taken before 1.4.2012, and consequently, the maturity proceeds of Rs 95,000 would not be exempt under section 10(10D) in the hands of Mr.Z, the tax deduction provisions under section 194DA are not attracted since the maturity proceeds are less than Rs 1 lakh.