Tax deduction at source from non-exempt payments under life insurance policy

The provisions of section 10(10D) of the Income-tax Act provides that 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 said section 10(10D).

Therefore, the sum received under a life insurance policy which does not fulfil the conditions specified under section 10(10D) are taxable under the provisions of the Income-tax 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 exempt under section 10(10D) of the Income-tax Act, a new section 194DA has been inserted. 

Payment in respect of life insurance policy. — “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 two 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 simple words, this provision provides, deduction of tax @2% on sum paid under a life insurance policy, including the sum allocated by way of bonus, which is not exempt under section 10(10D) of the Income-tax Act. 

Relevant extract from section 10(10D) is as follows,-

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

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

ii. any sum received under a Keyman insurance policy; or

iii. any sum received under any insurance policy issued on or after the 1^st day of April 2003, 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;

Provided that the provisions of this sub clause 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 this sub clause 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.

For the purpose 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 was connected in any manner whatsoever with the business of the first mentioned person.

In order to reduce the compliance burden on the small tax payers, it has been provided that no deduction under section 194DA is required to be made if the aggregate sum paid in a financial year to an assessee is less that Rs. 1,00,000/-.

References:

1. Circular No.1/2015 dated 21st January, 2015-
http://www.incometaxindia.gov.in/communications/circular/circular1_2015.pdf

2. http://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx