Taxpayers are sometimes unsure about how they should treat payouts received from a single premium insurance policy. Someone wrote to us and asked –
Question: I had taken a Policy from Bajaj Allianz Life Insurance co.Ltd. and paid single
premium on 25/3/2010 and surrendered 1/12/15. I have received Rs.193102/-
after deducting Rs.3941/- towards 2% TDS on the total amount.
Whether receipts are taxable or not, if yes at what rate?
Answer: If the premium is more than 10% of the sum assured, any money received from a life insurance policy is fully taxable. It is usually the single premium policy which fall in this trap, since premiums are high. Check if the premium paid by you is more than 10% of the sum assured. If that is true the amount received is fully taxable.
Starting October 2014, if the amount received from a policy is more than Rs 1,00,000 and it is taxable, TDS @ 2% shall be deducted by the insurer before making this payment.
If the amount received is less than Rs 1,00,000 no TDS shall be deducted but the amount received shall be fully taxable. It is taxed at income tax slab rates.
Do note that if a single premium life insurance policy is surrendered within 2 years, the deduction allowed in past under section 80C will be considered as income of the taxpayer in the year in which insurance policy is surrendered.
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