1. According to sec 194DA, 1 % of the maturity proceeds will be deducted by LIC if the payment exceeds Rs. 1,00,000. However, the above deduction is subject to exemption u/s 10(10D).
2. In your case since they have deducted TDS @ 1% on Rs. 5,00,000, it should not be an exempt income. It will be taxed under the head Income from Other Sources.
3. According to sec 57(iii), any other expenditure incurred (other than capital expenditure) laid out or expended wholly or exclusively for the purpose of making or earning such income will be allowed as deduction.
4. Keeping the above provision in mind it can be said that premium paid is an expense incurred and claim that against maturity proceeds.
5. However, the basic presumption is that LIC premium is exclusively allowed as deduction u/s 80C and it will not qualify as expenses. However, in situations where LIC premium is not allowed as a deduction, it may be considered for expenses. But in most of the cases, it will be allowed only as deduction u/s 80C.
6. Even though you have not claimed it as a deduction but it may raise doubt if you deduct the premium from maturity proceeds. Since your maturity proceeds reflected in your 26AS will be Rs. 5 lakhs.
Please correct me if the above interpretation has an alternative view.