Tax question: do you pay taxes on the proceeds of a surrendered insurance policy?

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I have taken out a single premium insurance policy, paying a premium of one lakh rupee on April 4, 2012. The policy, which expires next year in April 2022, offers insurance coverage (sum insured ) from 109,450. Due to medical requirements, I intend to terminate this policy prematurely and will receive an amount of approximately 235,000. Am I required to pay taxes on the excess amount of 135,000? The rule regarding insurance coverage being at least 10 times the premium paid, only came into vogue in September 2012 and therefore, in my opinion, is not applicable to this policy. What is your opinion on this? The insurance company is likely to deduct 5 percent as TDS. Will the tax situation change if I let the policy run its course until next year?

AR Ramanarayanan

Maturity proceeds from insurance policies issued on or after April 1, 2012 are tax exempt provided the premium paid does not exceed 10% of the sum insured. In your case, taking into account that the premium paid is greater than 10 percent of the sum insured, the amount received at maturity will be taxable in your hands. The insurance company would deduct 5 percent tax on the net proceeds, that is, on 135,000 in accordance with section 194DA of the law. Even if you allow the policy to run until next year, the maturity proceeds would be taxable in your hands, as they do not meet the conditions set out in section 10 (10D) of the law, as clarified above.

The writer is a partner, Deloitte India

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