TDS taxes on Single Premium Products Some investors are putting lakhs in single-premium products under the impression that they can earn tax-free returns. But they would be getting a bigger shock to know that product does not qualify for tax-free returns under Section 10(10D). IRDA guidelines allow single-premium product to offer minimum death benefit of 1.25 times of single premium and for those above 45 years of age 1.1 times. If you are above 45 and not healthy, the situation may be worse as your insurance company can load high mortality charges. Then your sum assured may not be 10 times the premium and, therefore, not tax exempt. The higher the age, the higher will be the loading in case of health issues due to higher risk for the insurer. Moreover, those living in rural and small towns will be severely affected by the new provisions, in case they do not have PAN cards. They will end up with 20% TDS instead of 2%. Taxing due to Not to Pay Minimum Premiums Suppose you had bought a regular premium policy and stopped paying after the first premium, since there will be no TDS; but you will still be taxed due to discontinuation of premium by reversing the 80C tax benefit which you had availed. You should pay minimum of two premiums for life insurance policy to avoid this reversal. Taxation is also applicable for single-premium policy, if you terminate it within two years after the commencement date. The same holds true for ULIP (unit-linked insurance policy) plans which they need to pay minimum five ULIP premiums, to avoid this tax anomaly. The worst part is that insurers and agents do not explain these tax implications while selling the product. Pension brings Tax Tension Do you know that pension plans from life insurance are the worst financial products with respect to return as well as taxation point of view?  If you surrender a pension product anytime before maturity, you will have to give back the tax deduction you had claimed under Section 80CCC. The surrender value has also to be added to your income and taxed as per your slab in the year of surrender. While tax benefits are reversed on surrender, annuity is taxed whether TDS is cut or not.  If you let the pension product mature, one third of the corpus can be taken out as tax free; the remaining has to be invested in an annuity product sold by the insurance company. An annuity policy will give you an average of 7% per annum returns for lifetime. Annuity is also taxable. If you do not want to invest in annuity, two-thirds of the pension corpus will be taxable. Conclusion When buying financial products, we should evaluate the impact of taxation besides impact of inflation on returns on investment. Further we get carried away by nomenclature of child plans or pension plans. It is better to buy simple insurance term plan and   invest balance of the premium in mutual funds factoring the risk appetite and goal horizon. By this, you will gain both in higher sum assured and return. You need not worry about different interpretations of taxation of insurance products and  a nasty taxation shock when the policy matures.