I had bought a single premium life insurance policy for Rs. 1,50,000 on 19/05/11 for ten years. The policy matured on 19/05/21. Maturity value was Rs. 3,30,000/-. The insurance company has deducted tax @ 10% on matured amount. My question is do I need to deposit balance income tax on the gross amount of Rs. 3,30,000 or on the difference of Rs. 1,80,000/-?
The maturity proceeds of a life insurance policy enjoy exemption under section 10(10d) of income tax act provided the premium paid in respect of the life insurance policy does not exceed 10% of the sum assured for any year during the premium paying term for the policies issued after 01-04-2012. For the policies issued between 01-04-2003 and 31-03-2012 the cap on premium is 20% of the sum assured. For the policies issued prior to 01-04-2003 there was no such restrictions as regards quantum of premium. Any amount received as death claim is fully tax free irrespective of the quantum of the premium paid.
Since the insurance company has deducted tax at source I presume the premium paid for the single premium policy exceeded 20% of the sum assured as the policy was taken between 01-04-2003 and 31-03-2012. As far as your question about the quantum of the taxable amount, out of the maturity amount received by you, is concerned there is no clear cut provision under the income tax laws but in my opinion the entire amount of maturity proceeds cannot be taxed and only the difference between premium paid and maturity proceeds should be taxed. One can draw inference from the provision for taxation of Unit Linked Insurance Polices (ULIP), with annual premium more than 2.50 lakhs in a year, introduced by budget 2021. The amended provisions propose to tax only the differential amount and not the entire maturity proceeds of ULIPs.
Since the amended provisions treat the ULIP policies as investments and tax the maturity proceeds accordingly, you can treat the premium paid by you as investment and even apply the benefit of indexation on the premium paid and compute the long term capital gains accordingly. Taking into account the cost inflation index of both the years you taxable long term capital gain comes to Rs. 71,576/- and tax @ 20% on it comes to Rs. 14,315/- lower than the actual amount of tax deducted at source and thus you may get refund of the excess tax paid. A word of caution: The tax officer may or may not agree with my contention to treat the premium paid as investment.