Those in the upper-middle classes well understand the concept of income tax. In India, the literacy rate for such facts is frequently low.
One of the major highlights of the Union Budget 2021 has been the income tax slabs. This way, a person will understand the tax system and what the government intends to do with it.
What is the income tax slab?
Individual taxpayers in India pay income tax based on a slab system. A slab system means that different tax rates are prescribed for various income ranges. It means that the tax rates continue to rise as the taxpayer’s income rises.
This type of taxation allows the country to have progressive and equitable tax systems. These income tax slabs are subject to change with each budget. These slab rates differ for different types of taxpayers. Income tax categorizes three types of “individual” taxpayers, including:
- Individuals (aged less than 60 years), including residents and non-residents
- Resident Senior citizens (60 to 80 years of age)
- Resident Super senior citizens (aged more than 80 years)
How does It work?
A person with a higher income will be subject to a higher level of taxation. The government also includes certain tax breaks for people who are required to pay long-term funds. The amount invested in various tax-saving schemes is ultimately deducted from gross income. This also helps to reduce the amount of income tax owed, which benefits taxpayers.
According to the union budget for 2021-22, gross tax revenue has increased by about 5% since 2019-20. Borrowings are also expected to increase by 27% over the fiscal year 2019-20.
The income tax slabs tend to change over time, always taking inflation into account. Aside from that, the government ensures that lower-income individuals receive an income tax rebate. The main idea behind the income tax slab is to ensure that the country has progressive and fair tax structures.
Deduction under Section 80C
If you paid an insurance premium to insure your own life or the life of a spouse or child, the premium payments are deductible under section 80C of the Income Tax Act. The deduction under section 80C is allowed whether your child is dependent or independent, minor or significant, married or unmarried.
Section 80C allows individuals and HUFs to claim this deduction. Many taxpayers are unsure whether this deduction is only available for life insurance purchased through LIC. This is not correct. A Section 80C deduction is available for premiums paid for a life insurance policy with any insurer approved by India’s Insurance Regulatory and Development Authority (IRDAI).
However, to claim a deduction under section 80C, the premium paid must not exceed 10% of the sum assured if the policy was issued after April 1, 2012. To claim this deduction for guidelines issued before April 1, 2012, the premium paid must not exceed 20% of the sum assured.
Exemption under section 10(10D) on Maturity amount received
When the premium paid on the policy does not exceed 10% of the sum assured for guidelines issued after April 1, 2012, and 20% of the sum assured for policies issued before April 1, 2012, any amount received on maturity of a life insurance policy or any amount received as a bonus is fully exempt from Income Tax under Section 10. (10D).
Policies taken after 1 April 2013 on the life of a person with a disability or a disease specified under Sections 80U and 80DDB, respectively, are also covered. The amount received on maturity is tax-free if the premium paid does not exceed 15% of the sum assured.
No exemption from income tax on the maturity of policies
Taxation occurs when the premium paid exceeds 10% of the sum assured. Any person’s life money received from a life insurance policy where the premium is more than 10% or 20% of the sum assured, depending on the case, is fully taxable.
TDS on life insurance policy
Starting in October 2014, if the amount received from a life insurance policy is more than Rs 1,00,000 and the policy is not covered by an exemption under Section 10(10D), the insurer must deduct TDS at 1% before making the payment. TDS will be deducted from bonus payments as well. If the amount received is less than Rs 1,00,000, no TDS will be deducted, but the amount will be fully taxable to you. TDS deducted from your income tax return can be claimed as a credit.
Tax liability of single premium insurance policies
Taxpayers may be unsure how to treat payouts from a single-premium insurance policy. Let’s look at an example to understand taxability better. Consider Sandesh, who purchased an insurance policy with a maturity value of Rs 1,10,000 from an insurance company. On September 16, 2013, he paid a single premium of Rs 45,000. 10% of the premium worked out to Rs 11,000 in rupees.
The premium of Rs 45,000 is more significant than 10% of the sum assured. As a result, the insurance maturity proceeds are taxable and are not exempt under section 10(10D) of the Income Tax Act. Sandesh surrendered the policy on September 16, 2019. Because the maturity payment exceeds Rs 1 lakh, the insurance company must deduct tax from the maturity proceeds. Before releasing the payment to the taxpayer, the insurance company is required to deduct 5% of the income component of the payment.
The TDS would be levied on the net maturity proceeds, which in this case would be Rs 65,000. (1,10,000-45,000). TDS would be 5% on Rs 65,000, amounting to Rs 3,250. Sandesh would receive Rs 61,750 in net proceeds (65,000-3,250). Sandesh should report the net maturity proceeds as “income from other sources” on his income tax return. Sandesh can also claim a TDS credit of Rs 3,250 against his tax liability when he files his income tax return.
Wrapping It Up
Paying income tax according to your tax bracket consistently contributes to the country’s development and helps you avoid penalties. So, to be a law-abiding citizen, keep the deadlines mentioned above, income tax slab, and tax rate in mind.