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Similar to tax deduction done at various income sources such as salary, interest income, and house rent, tax deduction at source (TDS) can 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:

  1. What does Section 194D say?
  2. Who must deduct tax under Section 194D?
  3. When and how much to deduct?
  4. Exceptions
  5. What does Section 194DA say?
  6. Who deducts tax under Section 194DA?
  7. When and how much to deduct?
  8. Exceptions
  9. No or lower tax deduction
  10. TDS certificate

1. What does Section 194D say?

Section 194D covers 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.

2. 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 insurance business should deduct tax.

3. 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.

    4. Exceptions

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

  • The commission paid is within Rs 15,000.
  • A self-declaration is available under Section 15G/15H.
  • 5. 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. The tax must be deducted at the rate of 1%.

    6. 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.

    7. When and how much to deduct?

    Tax is deducted at 1% at the time of making the payment to the payee.

    The union budget 2019 has proposed to amend the TDS on insurance policy proceeds to 5% on the amount of income comprised in the proceeds paid or payable upon maturity.

    8. 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 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 1% TDS. In this case, the TDS would be Rs 8,000. After deduction, Mr V will receive Rs 7,92,000.

    9. 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 for 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.

    10. No or lower tax deduction

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

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