This is the TDS which is deducted by the life insurance company while making the payment to the policyholder. “Section 194DA - Payment in respect of life insurance policy As per provisions of section 194DA, any person responsible for paying to a resident any sum under a life insurance policy, including the sum allocated by way of bonus on such policy, other than the amount not includible in the total income under clause (10D) of section 10, shall, at the time of payment thereof, deduct income-tax thereon at the rate of 5% on the amount of income comprised therein,” says the budget 2024 memorandum.
The amendment will take effect from 1st day of October 2024.
A lower TDS means a higher payout for the policyholders. "TDS reduction to 2% for payment of bonus or proceeds made on life insurance policies upon maturity will also ensure higher receivables for individual policyholders," says Parimal Heda, Chief Investment Officer, Go Digit General Insurance.
The biggest beneficiaries of this proposal will be policyholders with annuity plans from life insurance companies. "The reduction of TDS from 5% to 2% on life insurance policy payouts, as proposed in the Budget 2024, will ensure that policyholders gain a higher value from their life insurance policies. People who depend on income from life insurance plans like Annuity will benefit the most from this change. This will translate to less claim filings for TDS refund - resulting in more cash-in-hand, especially beneficial for lower income groups. This will further incentivise investing in pension products and retirement planning - leading to a more financially secured future," says Sarbvir Singh, Joint Group CEO, PB Fintech.
"The reduction in TDS rates from 5% to 2% is a welcome change, as policyholders especially in life insurance will be subject to lower rates of TDS. Apart from policyholders, insurance distributors such as insurance agents and insurance brokers will also enjoy greater cash flow with the reduction of TDS rates on payment of commission to them," says Shailaja Lall, Partner, Insurance & Reinsurance, Shardul Amarchand Mangaldas & Co.
