Sec 194DA Calculate Taxable Returns

from Life Insurance

CONTRIBUTED BY : MINTWISE 25 COMMENTS

Disclaimer : This article to calculate taxable returns on impact of Sec 194DA is for general
informational purposes only. It is not a substitute for professional tax-related or investment-
related advice. We recommend you consult a tax professional before you act on this or related
matters.

This is in continuation with the previous

article on how introduction of Sec 194DA has enforced insurance companies
to cut TDS on Life Insurance policies which are not compliant with Sec
10(10(d)) and whose income exceeds 1 lakh in a financial year. If you havent
read that article yet, we strongly suggest you do that before you read this one.
This article will specifically focus on how to calculate taxable returns based on
the impact of this new Section 194DA.

Background
Firstly, lets be honest here. When you had originally invested into a plan
whose Sum Assured is less than 10 times of the annual payable premium,
clearly with the motive of getting returns and not from the primary point of view
of getting life insurance cover. So you shouldnt be surprised if now, after this
new Section 194DA has been introduced, your investment in insurance is
getting taxed.

Your life insurance policy may have suddenly become a leaking bucket.
But you should not worry because you will not be worse off than your
normal tax liability.
Most of the cases affected by Sec 194DA are Single Premium policies which
do not meet the 1:10 criterion. Most traditional Single Premium policies almost
always yield profits, i.e. net positive returns. However, ULIP Single Premium
policies being market-linked may yield negative returns as well. That is, what
you get as final returns may be less than the total premium you paid.

Calculate Taxable Returns in case of Profits

from Life Insurance
This case is fairly straightforward. All you need to do is calculate the profits
and add it to your income in the year of receiving proceeds from the life
insurance policy. Here is an example to illustrate how the tax calculation
works.

Remember to also claim the TDS benefit, so you need to pay tax after
adjusting the TDS already deducted by the insurance company before they
paid you the maturity proceeds.
Calculate Taxable Returns in case of Losses
from Life Insurance
This is where there is some ambiguity amongst many of our readers. In such a
case, we refer to Circular No. 7/2003 dated 05-Sep-2003, Finance Act 2003
from the Income Tax department. As per that, tax should be paid on income
accrued on life insurance policies which does NOT include premium
paid by the assessee.

Heres the extract from the said circular.

From Circular No. 7/2003 dated 05-Sep-2003, Finance Act 2003 Explanatory Notes on
provisions relating to Direct Taxes, www.incometaxindia.gov.in and reader inputs*

10.3 The insurance policies with high premium and minimum risk covers are similar to deposits
or bonds. 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.

Therefore, when you calculate taxable returns if there is a loss from

investment into the insurance policy, i.e. what you get as return (before TDS
deduction) is less than what you paid as premium (including top-up), then no
tax is payable by the assessee. This is pretty logical as well since premium
you invested is anyway taxed earlier. It is also in sync with the treatment for
most other investment products. It is surprising though that insurers are still
deducting TDS on such cases.
Shown above is the calculation of taxable returns from Life Insurance in case
of loss from investment into a life insurance policy falling under Sec 194DA.

Customizing the Calculation of Taxable

Returns
Please note the following for both the calculations above.

1. Tax rate slab is assumed at 30%. You may make changes as per your
actual tax rate.

2. TDS and Tax payable shown here are only the basic taxes, i.e. they do
not include any cess or surcharge. Please add/deduct them from payable
amount/TDS respectively.

3. Effective June 1, 2016 the effective TDS rate has been reduced from
2% to 1%. Please use the rate that is applicable for your policy.

We hope this helps you get clarity on how to Calculate Taxable Returns for life
insurance policies under Sec 194DA. Do share your views in the discussion
thread below. And while it is great that you are thinking of your investments,
make sure that you protect your savings and assets with a term insurance
plan.

https://www.mintwise.com/blog/sec-194da-finance-bill-life-insurance-tds-tax/

Firstly, allow us to tell you what the benefit from Sec 10(10D) is all about.

BENEFITS FROM SEC 10(10D)

The Section 10(10d) states than any amount you get from a life insurance
policy, including ULIP, traditional policy or term plan (and excluding annuity,
pension plans, insurance policy for a disabled dependent and employer
sponsored group life insurance) will not be part of your taxable income
provided
premium in any year is more than 20% of the sum insured if it were bought
after 1st April 2003 but before 31st April 2012
or is more than 10% of the sum insured if it were bought after 1st April 2012
or is more than 15% of sum assured for policies bought after 1st April 2013
for disabled or those suffering from ailments (as per section 80DDB).

The above conditions do not apply to death claims or any amount received on
death of the insured person. Also, there is no cap on the extent of tax free
income from life insurance proceeds. Loans on policies will also not get
affected.

The government of India in the New Finance Bill of 2014 has very quietly
made a change that will affect those who hold a policy wherein the Sum
Assured as described in the Policy Document is LESS than 10 times of the
annual premium paid in any year during the term of the policy. Remember that
this includes top up premium as well.

NEW SECTION 194DA

According to the new Act introduced now, tax shall be deducted at source
(TDS) on payouts to Resident Indian customers if the cumulative payout
across all policies which are not exempt under section 10(10D) equals or
exceeds Rs. 1 lakh in a financial year.

In case PAN is available and valid, 2% TDS will be applicable.

In case PAN is invalid or not available, 20% TDS will be applicable!

In case your life insurance policy qualifies for Sec 10(10D), no TDS will be
deducted.
This change through Sec 194DA is with effect from Oct 1, 2014 and
insurance companies have already started communicating this to the policy
holders. If you havent received a communique yet, expect it soon.

AMENDMENT : Effective June 1, 2016 the effective TDS rate has

been reduced from 2% to 1%. Please note this change with respect to this
article.

WHICH POLICIES WILL GET AFFECTED

Most of the Single Premium policies are likely to get affected since most of
them have either 100%, 105%, 125% or 700% of the Single Premium as Sum
Assured. Unless you have consciously chosen to buy a Single Premium policy
with 1000% of the Single Premium (i.e. 10 times of premium) as Sum Assured
(which one would normally not do because Single Premium policies are
generally taken for investment and not protection), your policy proceeds are
going to be subject to TDS.

Some other life insurance policies which dont have Sum Assured as 10 times
annual premium are also likely to get affected. The best way to find out is to
take out that policy document which is lying deep inside the closet, blow the
dust away and go through the policy contract carefully.

A lot of customers who may not have PAN cards (especially those in rural
towns) are likely to get affected with a 20% TDS deduction.

WHAT CAN YOU DO IF YOU ARE AFFECTED

Very little to stop the TDS itself, because the insurance company has no
choice but to deduct it. If you had planned your financial goals based on that
policy, make a correction in your expectations based on the tax that you will
have to pay.

More importantly, you will now have to include the proceeds of such a
policy when you file your returns for the year and depending on your tax
slab, you could end up paying more as tax. Click on the link below to find out
how to calculate taxable returns for a life insurance policy coming under
Section 194DA.

How to Calculate Tax Payable on Life Insurance Policies under Sec

194DA

It could also happen that you file for return of tax paid if your income is not in
the taxable bracket. Whatever it is, dont forget to include the policy itself,
because the government unlike earlier times, now clearly knows the amount of
money you have received