In the Union Budget 2024-25, Finance Minister Nirmala Sitharaman announced that the Tax Deducted at Source (TDS) on life insurance payouts is to be reduced from the current rate of 5 per cent to 2 per cent. Additionally, the Budget 2024 has also proposed to reduce TDS for insurance commission(s) to individual agents effective from April 1, 2025.
The TDS for the payment of bonuses on life insurance policies and funds other than the amount not includible in the total income under Section 10D will be reduced to 2 per cent from 5 per cent starting from October 1, 2024.
What would this mean for the insured?
To put it simply, any reduction in TDS implies that the policyholder will receive a larger payout from their life insurance policies. The TDS, which your life insurance provider deducts before payment is made to you, will now be cut at a lower rate (2 per cent).
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Therefore this change translates to more money in your hands as a policyholder when your insurance policy matures or when a claim is settled.
Earlier, the 5 per cent TDS rate reduced the actual amount credited to policyholders. The new rule with the 2 per cent rate marginally benefits from increased payouts, as the tax deduction will be lower.'
Who will benefit from this change?
The reduction in TDS rates will mainly benefit the following policyholders:
1. Policyholders who hold a high-value life insurance plan will be able to see a significant increase in their net payouts after the reduction in the TDS rate.
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2. Policyholders who receive additional bonuses as part of their life insurance plan are set to benefit from this change since the lower TDS would push higher net amounts under such bonuses.
3. Retirees and senior citizens who rely on life insurance payouts as part of their retirement planning will also benefit from this change with a more substantial income, enhancing their financial stability.
In Budget 2023, the government had stated that income received from insurance policies issued on or after 1 April 2023 (other than ULIPs), having a premium or aggregate of premium over Rs 5 lakh in a given financial year, will be subjected to tax (exception in the case of the death of the insured).
Life insurance providers will implement this change starting October 1, 2024, after which policyholders will receive payouts with the adjusted TDS rate.
However, policyholders must reach out to their insurance companies for more clarity on how the reduced TDS rate will impact their particular policies. A review of your insurance policy would also provide more clarity regarding the benefits you will get upon payouts.
Though it’s marginal, the reduction in the TDS rate is a welcome move for policyholders, contributing to more benefits for them from their insurance policies.
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