K. ARAVIND
People in India have misunderstood life insurance as an investment. This is why policies like endowment plans and money back plans are widely sold. Life insurance companies also take advantage of this misconception and nurture sales fattening. Will stricter tax regulations help curb this trend?
Unlike long-term investment schemes like PPF, EPF and NPS, life insurance policies, especially those with investment, do not get full tax relief. Conditions for paying tax on income at the end of the investment term of the policies have been tightened.
194 DA in the Income Tax Act has been amended. As per the amendment introduced in the last financial year, five per cent TDS will be applicable if the net income earned at the end of the life insurance policy is taxable. Net income is calculated by deducting the premium paid up to that point from the amount received from the insurance company. The bonus will also be treated as net income.
At the same time, TDS is not applicable if the total amount received from the insurance company is less than Rs.1 lakh. TDS is not applicable if the Minimum Sum Assured is transferred to the nominee after the death of the policy holder. Therefore, TDS is not applicable for claims on term policies.
If the annual premium is more than 10% of the sum assured, income tax is applicable. For example, if the annual premium of a policy with an insurance premium of Rs.2 lakh is above Rs.20,000, income will be taxable.
In case of life insurance policies issued before April 1, 2012, tax deduction will not be available if the sum insured is less than five times the premium. That is, the policyholder is liable to pay the tax as per his tax slab, including the income received at the end of the policy term.
As per the rules enacted in 2012-13, not all life insurance policies are tax deductible under Section 80 (c) of the Income Tax Act. No tax deduction is available if the annual premium is more than 10% of the sum assured (Sum Assured). Income earned on withdrawal of investment from such policies is taxable. At the time of withdrawal, the policyholder has to pay the amount after 5% TDS directly.
