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What is Section 194D and Section 194DA under Income Tax Act?

Updated on:  

08 min read

Similar to tax deductions done at various income sources such as salary, interest income, and house rent, tax deductions at source (TDS) are also required to be done on insurance commission and life insurance premium payments. 

Section 194D and Section 194DA under the Income Tax Act, 1961 are the provisions applicable respectively. Let us look into these provisions in detail:

What does Section 194D say?

Section 194D basically covers TDS on insurance commission.

 Any payments made by way of :

  • any remuneration/reward in the form of commission or otherwise , 
  • For procuring insurance business (including business relating to the continuance, renewal or revival of policies of insurance) . 

The deduction must be made at the time of crediting the money to the payee’s account or at the time of payment in the form of cash, cheque, draft, or any other mode. 

Tax is deductible only if the amount paid or payable or the aggregate of the amounts of such income paid or payable during the financial year exceeds Rs 15,000.

Who must deduct tax under Section 194D?

Any person who makes a payment to a resident Indian in the form of remuneration or reward as part of the insurance business should deduct tax.

The provisions of TDS deduction under section 194D is applicable to resident individuals only, in case of non-residents section 195 will be applicable. 

When and how much to deduct?

Tax is deducted at the earlier of the following cases:

  • At the time of credit of commission in the payee’s account.
  • When the actual payment is made in cash, cheque, draft, or other modes.

According to Section 194D, the tax is deducted at different rates based on the type of payee:

  • Individuals: 5%
  • Domestic companies: 10%

If the payee has not quoted PAN, the tax will be deducted at the rate of 20%. You must also know that surcharge and SHEC will not be applicable to these rates.

Exceptions

Tax need not be deducted from the amount the payer credits to the payee’s account in the following cases:

  • The commission paid is within Rs 15,000.
  • A self-declaration is available through Form 15G/15H.

What does Section 194DA say?

Any payment to be made to a resident Indian upon the maturity of a life insurance policy including the bonus, other than the amount included in the total income under clause (10D) of Section 10, will suffer a tax deduction at source. 

What does Section 194DA say?

Any person who makes a payment to a resident Indian upon maturity of a life insurance policy will deduct the applicable taxes at source under Section 194DA.

When and how much to deduct?

The tax must be deducted at the rate of 5% on only the ‘income part’ of the payment. (3.75% from 14 May 2020 to 31 March 2021). Which means, TDS will be applicable only on the amount exceeding the total of the premiums paid by the insured.

(The union budget 2019 has proposed to amend the TDS on insurance policy proceeds)

TDS rate would increase to 20% in case the deductee fails to submit the PAN number. 

When and how much to deduct?

There is no need to deduct taxes if the aggregate payable amount is within Rs 1 lakh.

For example, consider Mr V received a maturity amount of Rs 8 lakh from his life insurance policy. Mr V has paid an amount of Rs 3 lakh as a premium for the policy over a period of 10 years. 

In this case, the maturity amount is above Rs 1 lakh. Hence, the maturity proceeds will be paid after deducting 5% TDS. 

In this case, the TDS would be Rs 25,000 (5% on Rs. 5 lakh). After deduction, Mr V will receive Rs7,75,000.

No or lower tax deduction

If you are a commission earner from an insurance business, you can send Form 13 to the assessing officer requesting a certificate that authorises the payer to not deduct tax or deduct at a lower rate. This provision is available under Section 197.

However, Section 206AA(4) says that the non-deduction or lower deduction rate is not applicable unless the applicant has quoted PAN.

No or lower tax deduction

The deductee/recipient will receive TDS certificates summarising the insurance commission payments and the TDS thereon.

Exemptions under section 10(10D)

According to section 10 (10D), any sum received under the LIC policy including the amount of bonus is exempted. 

This section has following exemptions to it:

  • Any amount received under section 80DD (3) or 80DDA (3).
  • Any amount received under keyman insurance policy
  • LIC policy is bought after 1st April 2003 but before 31st March 2012 and premium is more than 20% of the sum assured. 
  • LIC policy is bought after 1st April 2012 and the premium paid is more than 10%  of sum assured. 
  • LIC policies bought for persons with disability or severe disability according to section 80U , or  for individuals suffering from ailments covered under section 80DDB after 1st April 2013 , and the premiums are more than 15% of sum assured. 

There is no ceiling limit for claiming exemption under section 10(10D) unless above mentioned conditions are satisfied. 

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