Re: Deduction of Income Tax at source from sum payable under the Life Insurance Policy in terms of Section 194 DA of the Finance Act 2014

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1 CRM Department, Central Office. 5 th Floor (Link), Yogakshema, Jeevan Bima Marg, P.O.Box No.19953, Mumbai Tel : , Fax : co_crm@licindia.com Ref: CO/CRM/ 946 /23 September 27, 2014 To, All Zonal Managers, All Regional Managers (CRM) All Sr/Divisional Managers, M.D.C., Audit & Inspection Re: Deduction of Income Tax at source from sum payable under the Life Insurance Policy in terms of Section 194 DA of the Finance Act 2014 The Finance Act 2014, has introduced section 194 DA in the Income tax Act, 1961 requiring deduction of tax at source at the prescribed rate from any sum paid including bonus to a resident of India under a life insurance policy, provided such policy payment is not eligible for exemption under section 10( 10 D) of the Income tax ACT,1961 and also if the gross payment under all such policies during the financial year is Rs. 1 lakh and more. In view of the above provision, we have examined the issue at our end and clarify the matter as under with following instructions:- A) Applicability of section 10(10 D) of the Income Tax Act, 1961 Any sum received including bonus under Life Insurance policies which is not exempted under section 10( 10D) of the Income Tax Act, 1961 would now be subject to deduction of tax at 2%. Such exemption under section 10 (10D) is NOT available for the following policies where:- 1. Policies issued on and after but upto where premium payable for any of the years during the policy term exceeds 20% of actual capital sum assured. However, Death claim payment is exempted. 2. Policies issued on and after and premium payable for any of the policy year during the term of the policy, exceed 10% of actual capital sum assured. However, death claim payment is exempted. 3. Any sum received under Jeevan Aadhar plan no -114, if dependant predeceases proposer of the policy sub to Section 80 DD( 3) of Income tax act This is irrespective of date of commencement of policy. 4. Any policy issued on and after for the insurance on the life of any person who is (a) a person with disability or a person with severe disability as referred to in section 80 U or (b) suffering from disease or ailment as specified in the rules made under section 80 DDB where the premium payable in any of the year is more than 15% of the actual capital sum assured provided such disability or illness is disclosed by the life assured at the time of taking the policy. 5. Any sum received under a Key man insurance policy irrespective of date of commencement of policy.

2 B) Determination of applicability of section 194 DA :- 1. The provisions of section 194 DA requiring deduction of income tax at source are not applicable for those policies where policy payment is exempted under section 10(10D) above. 2. For policies issued ( DOC) upto 31/3/2003, tax at source under section 194DA will not be deducted from any policy payment made under such policies where date of payment is on or after 1/10/2014 excluding policies issued under key man insurance and claim proceeds under Jeevan Aadhar plan 114 as mentioned earlier. 3. If the policy is issued on or after 1/4/2003 and not eligible for exemption under provisions of section 10 ( 10 D), then such policy will be liable for deduction of tax at source excluding policies issued under key man insurance and claim proceeds under Jeevan Aadhar plan 114 as mentioned earlier. 4. The exemption under section 10 ( 10 D) should be applicable provided the total amount of premium payable in any of the policy year does not exceed 10% / 20%/ 15% of the capital sum assured as per condition 1, 2 and 4 of non-exemption applicability of section 10( 10D). If this limit has exceeded in any one year during the term of the policy, then such policy will not be exempted under section 10 ( 10 D). Under some of the plans, premiums payable in 1 st policy year and subsequent years are different. 5. It may be noted that the policy master does not contain handicapped status and therefore such policies can not be identified through e-feap program. As explained in A-4 above, if any policyholder claims exemption under this clause, then our offices will have to check the eligibility criteria accordingly. 6. Under annuity/ pension plans where no risk cover or death sum assured is available such policies are not covered under section 194 DA of the Income tax Act,1961. Hence, there is no need to deduct any tax at source from policy payment. C) Actual deduction of tax from policy payment under section 194 DA and rate of tax to be deducted:- 1. Actual tax deduction at source from policy payment will be effected if the total gross amount payable under all non-exempted policies as explained in B-3 above held together on single life during one financial year is Rs. 1 lakh and above. Example :- During F.Y , policy payment is settled under 5 different policies to one policyholder/ claimant. Out of these 5 policies, policy payment under 2 policies are eligible for exemption under section 10 ( 10 D). The policy payment under other 3 policies are not eligible for exemption under section 10 ( 10 D). The threshold limit for deduction of tax at source under section 194 DA i.e Rs. 1 lakh should be seen on aggregating gross payment made during F.Y under these 3 policies. If the total gross payment is Rs. 1 lakh or more, then income tax is required to be deducted from the policy payment where this limit of Rs. 1 lakh has been reached or exceeded taking into account the entire gross amount under 3 policies. 2. The rate of tax to be deducted at source will be 2% on gross amount payable under the policy provided policyholder provides the valid PAN number with photocopy of the PAN card. 3. As per section 206AA of Income tax act, 1961, if the policyholder is not having PAN or not able to furnish the PAN details or furnishing wrong PAN, the rate of tax to be deducted at source will be 20%.

3 4. The threshold limit of Rs. 1 lakh and above should be arrived on gross amount payable during the financial year under the policy/ies held by life assured which are not exempted under section 10( 10D). 5. The tax will be required to be deducted in the financial year in which the actual payment under the policy is settled. Hence, threshold limit of Rs.1 lakh should be ascertained accordingly as per date of payment under the policy. 6. If any policyholder submits F. no 15 H/ G request for no tax deduction at source or request for tax deduction at any altered rate, then such request should not be accepted. D) Definition of Capital sum assured, amount of premium paid for the purpose of exemption under Section 10( 10D) 1. For policies issued ( DOC) from 1/4/2003 to 31/3/2012, the capital sum assured will be Death sum assured applicable in the policy year of premium paid/ payable. In short, if the total amount of premium payable in any of the policy year exceed 10% of the capital sum assured, then such policy will be treated as non-exempt under section 10( 10 D). For example:- plan 133_ Jeevan Mitra Triple cover, the death sum assured for policy issued between this period will be triple the basic sum assured. The premium payable in any of the policy year should be compared to triple basic sum assured. 2. For policies issued on or after 1/4/2012, the capital sum assured will be the minimum death sum assured available during the policy term and not available during the year of premium paid/ payable or premium paying term only. For Example :- Jeevan Surbhi plan- 106,107,108- for policy issued under this period, the minimum death sum assured will be basic sum assured and not the increased death benefit which increases after every 5 years. 3. Capital sum assured will not include rider benefit sum assured like sum assured under critical illness rider, accident benefit, term rider, premium waiver benefit should not be taken into account. 4. The capital sum assured will not include any bonus, return of premium etc. 5. While calculating amount of premium payable during any of the year of policy term, instalment premium will include the premium paid for basic sum assured, any extra premium for health/ build/ occupation, premium for accident benefit/ term rider, critical illness rider. 6. The premium payable under ULIP plans will also include top up premium paid if any. E) Other clarifications in respect of section 194DA of income tax act 1. The provision to deduct the tax at source will be applicable for policy payments made on or after 1 st October However, for the financial year , if any policy payment have been made under such non-exempt policy under section 10 ( 10D) as defined under B-3 above prior to 1/10/2014 and any further payment is being made on or after 1/10/2014, then such both payments should be clubbed together. If gross amount exceeds Rs. 1 lakh and above, then TDS will be deducted from policy payment which is settled after 1/10/2014. However, the tax will be deducted taking into account an amount which is paid on or after 1/10/2014. Example:- under policy which is not exempted under section 10 ( 10D),survival benefit of Rs was settled before 1/10/2014. The said policy is being surrendered between 1/10/2014 to 31/3/2015 and amount payable by way of surrender is Rs , then TDS will be deducted at rate of 2% or 20% on the amount of Rs. 50,000.

4 3. If payment is being made to person or institution in the capacity of assignee, legal heirs, karta under HUF, trustee under MWP act, employer under employer employee scheme ; then PAN details of such claimant should be called for. However, threshold level of Rs. 1 lakh should be ascertained for all policies taken together on the life of life assured. 4. If policy payment is settled in favour of more than one claimant, then PAN details should be called for all claimants. 5. The guidelines of section 194DA are applicable for Resident policyholders. If policy payment is being made to non-resident policyholder, the provisions of section 195 of the income tax act1961 will be applicable. 6. Policy payment for the purpose of section 194DA will include payments like survival benefit claim, maturity claim, discounted value of maturity claim, instalment under settlement option of maturity claim, commutation value or amount utilized to purchase the annuity on vesting under annuity/ pension plans with risk cover, gross surrender value, gross amount of surrender value in case of policy loan foreclosure, disability benefit under EPDB claim, any sickness benefit under critical illness, unclaimed and outstanding amounts, claims settled but outstanding where tax is not deducted but payment is made on or after 1/10/2014 etc.( provided exemption under section 10( 10D) is not applicable and total payment during financial year exceeds threshold limit) 7. Policy payment for the purpose of section 194 DA will exclude payments like death benefit, loan under the policy, refund of premium or policy deposit, annuity or pension payment after vesting, payments under health insurance plans, claims settled but outstanding where tax is already deducted. 8. If any penal interest is payable on delayed settlement of claim or on any delayed sum payable under the policy or interest payable on reinvestment of survival benefit claims under plans like 128,160,192,129,131, then such penal interest should not be treated/ clubbed together for assessing threshold limit under section 194 DA. Needless to add that, if such penal interest or interest portion on reinvested survival benefit amount is eligible under section 194 A, then income tax at source will be required to be deducted at appropriate rates. 9. For outstanding survival benefit and maturity claims due upto 30/9/2014 which will be settled on and after 1/10/2014, the provisions of section 194 DA will be applicable if such policies are not exempted under section 10( 10D) For issue of F. no 16-A certificate in respect of tax deducted at source to policyholder and filing of income tax returns for tax deducted at source under section 194 DA, all the provisions as mentioned in circular dt. 24/6/2010 ref:- EDA/ZDB/934 issued by Finance and Accounts Dept will be applicable. 11. The account code Income tax Deduction from payment made to policyholders should be operated for all segments of business for recovering and payment of tax deducted at source under section 194 DA. 12. For eligible policies where tax at source under section 194 DA will be required to be deducted, all our offices should obtain the details of PAN with self attested photo copy of the PAN card. The PAN number of the policyholder / claimant should be captured in our policy master through RFM before preparation of payment voucher. The correctness of the PAN card should be ensured before capturing the details. Photo copy of the PAN card should be sent to incremental scanning without fail. 13. For ascertaining the threshold limit of Rs. 1 lakh of policy payments under all policies held together on single life, our offices should see the claim payment history available in e-feap module, previous policy details mentioned in proposal form or through any

5 other source. IT Dept has informed us that in absence of any Unique identification number like PAN number or Aadhar number for each policyholder, aggregation of policies of single policyholder will not be possible though program of the module. Hence, ascertaining the threshold limit should be done manually. However, IT dept will make the option available to list out the policies which are not exempted under section 10( 10D) shortly. F) Action plan for implementation of the provisions of section 194 DA:- 1. For policy payments which are effected on or after 1/10/2014 and onwards, our offices should ascertain the date of commencement of policy, gross amount of policy payment and whether policy is under key man insurance. 2. If the date of commencement of policy falls as per criteria mentioned in A) Applicability of Section 10 ( 10D) of Income Tax Act, 1961, then ascertain whether the premium payable in any of the policy year exceeds the permissible limit of 10% / 20%/ 15% of capital sum assured as defined earlier. If yes, such policy will be eligible for deduction of tax at source 3. For actual deduction of tax, our offices should ascertain whether gross policy payment under this policy including under other non-exempted policies under section 10( 10D) is Rs. 1 lakh or more during one financial year. If yes, the tax is required to be deducted at the stage of the policy payment. Our offices should make every effort to collect the PAN card details by contacting policyholder or through field force. 4. In respect of survival and maturity claims, our office should inform the respective policyholder about this tax deduction at source and call for the self attested photo copy of PAN card, if not available with us. Claim intimation letter should include one line in this respect by way of rubber stamp. 5. Under other policy payments, our offices should send the information in quotation or letter issued to policyholder about deduction of tax at source and call for the photo copy of PAN card. 6. If policyholder is not able to produce PAN card details, then before proceeding further for deduction of tax at source at the rate of 20%, one declaration may be obtained mentioning the reasons for non-availability of PAN card and consent to deduct tax at altered rate. 7. Each section of the office where such tax deduction at source from policy payment is effected should maintain one manual register for reconciliation and control purpose. The columns may be 1) sr no 2) Policy number where tax is being deducted 3) name and address of the policyholder/ claimant 4) other policy number with amount which are considered for deciding threshold limit 5) gross amount of policy payment 6) amount of income tax deducted 7) type of payment 8) date of payment 9) date of issue of F. No 16-A 10) Remarks. 8. All our offices should strictly adhere to the provisions in respect of deduction of Income tax under section 194 DA in respect of policy payments. The provisions for issue of F. No 16-A and filing returns should also be strictly adhered. Kindly, bring the provisions of this circular into the knowledge of the offices under your control immediately. Chief (CRM)