I took one premium insurance policy, and paid one premium of Rs. lakh on 4th April 2012. The policy, which expires next year in April 2022, provides insurance coverage (guaranteed sum) of €109,450. Due to medical exigencies, I intend to waive this policy prematurely, and I will be given a sum of approximately INR 235,000. Am I required to pay tax on the excess amount of INR 135,000? The rule regarding insurance coverage of at least 10 times the premium paid, became popular only in September 2012, and therefore in my opinion, does not apply to this policy. what do you think about this? The insurance company will likely charge a 5 percent discount as a TDS. Will the tax situation change if I allow policy to run its course until next year?

AR Ramanarayanan

Benefit proceeds arising from insurance policies issued on or after April 1, 2012 are tax-exempt provided that the premium paid does not exceed 10 percent of the amount guaranteed. In your case considering the fact that the premium paid is more than 10 percent of the amount guaranteed, the amount of benefit received will be taxable in your hands. The insurance company will deduct taxes at 5 per cent on the net proceeds i.e. on INR 135,000 as per Section 194DA of the Act. Even if you allow the policy to run until next year, the accrual proceeds will be taxable in your hands because the same does not meet the requirements under Section 10 (10d) of the Act as explained above.

Partner writer, Deloitte India

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