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TDS hike affects insurance policies with high component of saving or investment, says financial adviser Harsh Roongta

Updated : July 15, 2019 06:44 PM IST

Finance minister Nirmala Sitharaman announced a hike in tax deducted at source (TDS) on life insurance policies during her inaugural Union Budget presented on July 5 means.

Harsh Roongta of harshroongta.com answers queries on what the finance minister's announcement entails.

Speaking about the 5 percent TDS on gains on life insurance policies, Roongta said: “I would hesitate to use the word hike for this. It need not necessarily be a hike because the base on which the TDS is applied has been changed. So earlier on the total maturity value 1 percent was deducted now the surplus over the premium payed on that 5 percent will be deducted.”

He added: “It is possible that the 5 percent on the surplus might be higher than the 1 percent but it is also likely or also possible that this 5 percent on the net might be lower than the 1 percent on overall maturities so I won’t call it a hike, it is a change in the TDS rate and the method on which it is calculated.”

Talking about its impact on market linked insurance policies, he said: “It impacts equally the market linked policies or the traditional saving based policies. It only impacts those policies where on death the sum assured is less than 10 times the annual premium. Those polices are taxable. It is only the taxable policies on which TDS is deducted.”

He added" “It only affects those low insurance policies with a high component of saving or investment, it is only those policies that are affected whether they are market linked or whether they are traditional.”

Roongta continued: “There was a confusion before this amendment came as to what is taxable, although it is clear only the surplus could be taxable yet tax officers were taking different views. So with this amendment at least it is very clear that the premiums themselves cannot be taxed. It is only the surplus over the premium. The confusion now still remains whether this surplus can be taxed as income from other sources or can it can be taxed as capital gains.”

Talking about polices that he would recommend, he said, “Insurance should be used as insurance and insurance basically means protection. I would only recommend pure term insurance plans that protect your family that gives a lump sum to your family in the event of your death because the premium for that comes at a very affordable rate and it gives you adequate cover.”
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