LIC under Income tax – Deduction, taxability & TDS on Maturity
LIC is a contract with insurance company that provides a lump-sum agreed amount to the beneficiaries, in case of death of insured. Life Insurance Policy (LIP) is useful for saving Tax as well. Lets discuss benefits of Life insurance under Income tax.
Tax Deduction of Premium paid
Whenever, one takes life insurance policy, first we pay an amount as premium. The amount of premium paid for life insurance is a deductible expense under Income tax but with certain limitations.
Deduction under section 80C is available in respect of life insurance premium, public provident fund, National saving certificate, Post office time deposit scheme, Senior Citizen saving scheme, repayment of principal component of housing loan, etc. However, the aggregate limit provided for all such deduction is Rs. 1,50,000.
But, is it like one can get deduction of any amount that he wish to or deduction of amount for any person or is there any minimum holding period required? Well, to counter this concern let’s move further and clear our doubts.
So, there are some conditions and restrictions attached to it which are explained as below.
1. Premium paid for others
The deduction of premium on life insurance policy is allowed in respect of policy taken in name of tax payer, spouse or children. That means if the life insurance is taken for parents or siblings then deduction is not allowed under this section.
2. Maximum Limit of Deduction
As discussed earlier, maximum limit of deduction under this section is restricted to Rs. 1,50,000 including deduction under section 80CCC and 80CCD.
3. Holding period
Minimum holding period required for life insurance policy is of 2 years. ULIP policies, senior citizens saving scheme and post office time deposit, the minimum holding period is 5 years.
4. Deductible LIC Premium amount
Deduction of life insurance premium allowed is lower of following two amounts:
- If Policy is issued on or before 31/3/12, then Premium amount OR 20%of capital sum assured.
- If Policy is issued on or after 1/4/12, then Premium paid OR 10% of capital sum assured.
- In case of person suffering from disability or severe disability s referred to in section 80U/80DDB, then Premium paid OR 15% of capital sum assured.
Now, the question might arise in one’s mind that minimum holding period required is 2 years then how can one take deductions before that. To answer that concern, in case if policy period is not fulfilling the holding period of 2 years then deduction taken in earlier year would be considered as the income of previous year and no deduction would be allowed in respect of contribution/payment of such policy.
Maturity Amount of LIC
Now the next question in Income tax is what about the proceeds of Life insurance policy? Is it taxable or Exempt? Is there any limit and many other question. So let’s have a look at this factor. Well, all these things are covered under section 10(10D) of income tax act, 1961.
As per Section 10(10D) of Income tax, any amount of sum assured received as proceeds from life insurance policy on maturity or surrender of policy or in event of death of person are Tax Free (exempt).
But in case if life insurance is issued after 1/4/2003 but on or before 31/3/2012 and the premium payable in any year is more than 20% of actual sum assured, then the policy proceeds received would be taxable in hands of insured. And for the purpose of meaning of Assured value, it shall be the lowest amount in all the year and shall not include any bonus element. The actual sum assured shall also not include any amount of premiums which are to be returned to the policy holders.
For policy which has been issued on or after 1/4/2012 and the premium payable in any year is more than 10% of actual sum assured, then the policy proceeds received would be taxable in hands of insured. And in case of life insurance policy for disabled, from 1/4/2013, the premium payable in any year is more than 15% of actual sum assured, then the policy proceeds received would be taxable in hands of insured.
However, if any of such amount is received by the nominee then it shall not be taxable even if the premium paid in any previous year is more than 10%/15%/20%.
TDS on LIC Proceeds
So, now, we all know the benefits and taxability of Life insurance but to end up with, let’s understand if TDS is applicable to LIC proceeds?
Section 194DA says that, any amount received by an insured Indian resident from life insurer then it shall be subject to TDS @ 5% (Rate from 14th May 2020 to 31st March 2020 is 3.75%) subject to condition that the amount is not exempt as discussed above. However, any proceeds received above Rs. 1,00,000 (Net of premium) shall be liable for deduction of TDS.
For any questions, you may reach us at Discussion Forum
The author of the above article is CA Rahul Gaur.
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