Section 194DA and 194D of the Income Tax Act
Updated: Oct 1
The Income Tax Act of India outlines specific tax provisions regarding TDS (Tax Deducted at Source) on insurance-related payments under Section 194D and Section 194DA. These sections primarily govern the deduction of TDS on insurance commissions and life insurance policy payouts. The provisions are designed to ensure that appropriate taxes are deducted before the funds are received by agents or policyholders, thereby reducing the burden of tax evasion.
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Budget Update 2024
The Union Budget 2024 introduced significant changes to the TDS regime under Sections 194D and 194DA:
Section 194D: The TDS rate on payments related to life insurance commission has been proposed to be reduced from 5% to 2%, effective from 1st April 2025. This move aims to ease the tax burden on insurance agents and intermediaries, especially those earning lower commissions.
Section 194DA: The TDS rate on life insurance policy payouts (non-exempt under Section 10(10D)) will also be reduced from 5% to 2%, effective from 1st October 2024. This will reduce the tax impact on policyholders who receive maturity or surrender amounts from life insurance policies.
These reductions are expected to streamline tax compliance and provide relief to both insurance agents and policyholders, aligning with the government's initiative to support the insurance sector.
What Does Section 194D Say?
Section 194D applies to TDS on commissions paid by insurance companies to agents or intermediaries for selling or procuring insurance policies. The section ensures that tax is deducted at the source on such commission payments.
Who is Eligible under Section 194D?
Under Section 194D, TDS must be deducted by the following entities:
Insurance companies paying commission to agents.
Corporate agents, individual agents, or insurance intermediaries receiving commissions from these companies for selling or procuring insurance policies.
Time Limits for Deduction of TDS under Section 194D
The law mandates that TDS under Section 194D should be deducted at the earlier of the following events:
At the time of payment of the commission to the insurance agent.
At the time of crediting the amount of commission to the agent’s account.
Rate of TDS Deduction under Section 194D
The TDS rate under Section 194D currently stands at 5% on the commission amount. However, as per the Budget 2024, the rate will be reduced to 2% from 1st April 2025. The deduction is made only if the total commission exceeds INR 15,000 in a financial year.
For instance, if an insurance agent earns INR 20,000 as commission in a financial year, the insurance company is obligated to deduct 5% TDS (or 2% from FY 2025-26) on this amount.
Exceptions under Section 194D
Several exceptions exist under Section 194D:
No TDS is required to be deducted if the annual commission paid does not exceed INR 15,000.
If an agent submits a Form 15G/15H, which declares that their income is below the taxable limit, TDS can be reduced or waived altogether.
Agents can also apply for a lower deduction certificate under Section 197, allowing TDS at a reduced rate based on their estimated tax liability.
Penalty for Late Deduction
Failure to deduct or deposit TDS on time under Section 194D leads to strict penalties:
Interest is charged at 1% per month or part thereof for delayed deduction of TDS.
If TDS is deducted but not deposited on time, an interest rate of 1.5% per month is applicable until the amount is paid to the government.
Penalties may also include a fine up to the entire amount of TDS not deducted or late payment.
What Does Section 194DA Say?
Section 194DA pertains to the deduction of TDS on life insurance policy payouts that are not exempt under Section 10(10D). This applies to any amount paid to a resident individual, upon the surrender, maturity, or bonus of a life insurance policy.
Rate of TDS under Section 194DA
The current TDS rate under Section 194DA is 5% on the net income component, i.e., the maturity or surrender value minus the premiums paid by the policyholder.
However, as per Budget 2024, the TDS rate will be reduced to 2%, effective from 1st October 2024.
For example, if a policyholder receives a maturity amount of INR 5,00,000, and the total premium paid was INR 3,00,000, the net taxable income would be INR 2,00,000. The TDS on this would be INR 10,000 (5%) or INR 4,000 (2% from October 2024).
Exemptions under Section 194DA
No TDS is deducted if the maturity proceeds or surrender value is exempt under Section 10(10D).
If the total payout amount is less than INR 2,50,000, no TDS is deducted, even if the payout is from a non-exempt policy.
If the policyholder provides a declaration under Section 197, TDS can be deducted at a lower rate or not deducted at all based on their income status.
TDS Certificate under Section 194DA
The payer (insurance company) is required to issue a TDS Certificate (Form 16A) to the payee, stating the TDS deducted. This certificate must be issued quarterly and is crucial for the taxpayer to claim credit for the TDS in their income tax returns.
Exemptions under Section 10(10D)
Under Section 10(10D) of the Income Tax Act, life insurance proceeds are fully exempt from tax if certain conditions are met:
For policies issued after 1st April 2012, the annual premium should not exceed 10% of the sum assured.
For policies issued between 1st April 2003 and 31st March 2012, the premium should not exceed 20% of the sum assured.
All death benefit payouts are exempt from tax, regardless of premium limits.
Difference Between 194D & 194DA
Section 194D deals with insurance commission payments, while Section 194DA pertains to life insurance policy payouts.
The rate of TDS under Section 194D is currently 5% (reducing to 2% from April 2025), while under Section 194DA, the rate is also 5% (reducing to 2% from October 2024).
Threshold limits: Under Section 194D, TDS applies if the commission exceeds INR 15,000, whereas under Section 194DA, TDS applies only when the payout exceeds INR 2,50,000 for non-exempt policies.
FAQs
Q1. When will the new TDS rates under Section 194D and 194DA be effective?
The new rate of 2% under Section 194D will be effective from 1st April 2025, while the 2% under Section 194DA will be effective from 1st October 2024.
Q2. Will TDS be deducted on the entire insurance payout under Section 194DA?
No, TDS is deducted only on the net income component, i.e., the payout amount minus the total premium paid by the policyholder.
Q3. Is there a way to reduce or avoid TDS deduction under Section 194D and 194DA?
Yes, if an agent or policyholder’s income is below the taxable limit, they can submit Form 15G/15H or apply for a lower deduction certificate under Section 197 to reduce or avoid TDS.
Q4. What is the difference between the TDS under Section 194D and Section 194DA?
Section 194D deals with TDS on insurance commission payments to agents, while Section 194DA pertains to life insurance policy payouts to policyholders. Both sections have different thresholds and purposes, targeting insurance agents in the former and life insurance payouts in the latter.
Q5. Is there a minimum commission amount under Section 194D where no TDS is deducted?
Yes, if the total commission does not exceed INR 15,000 in a financial year, no TDS is deducted under Section 194D.
Q6. What is the threshold for TDS under Section 194DA for life insurance payouts?
Under Section 194DA, TDS is deducted if the payout exceeds INR 2,50,000 from non-exempt policies. For policies exempt under Section 10(10D), no TDS applies regardless of the payout amount.
Q7. How do I know if my life insurance payout is exempt from TDS under Section 10(10D)?
Your life insurance payout is exempt under Section 10(10D) if the annual premium paid does not exceed 10% of the sum assured for policies issued after 1st April 2012. For earlier policies, the premium limit is 20% of the sum assured.
Q8. What happens if I fail to deduct TDS as required under Section 194D or Section 194DA?
Failure to deduct TDS or failure to deposit it with the government leads to penalties and interest. The penalty includes an interest rate of 1% per month for failure to deduct and 1.5% per month for failure to deposit the deducted amount.
Q9. Can a life insurance policyholder avoid TDS under Section 194DA if their income is below the taxable limit?
Yes, a policyholder can submit Form 15G or Form 15H to the insurance company declaring that their income is below the taxable threshold, and TDS may not be deducted.
Q10. When will the new TDS rates (2% under Section 194D and Section 194DA) become effective?
The new TDS rate of 2% under Section 194D will come into effect from 1st April 2025, while the new TDS rate of 2% under Section 194DA will be effective from 1st October 2024.
Q11. Are the death benefits from life insurance policies always exempt from TDS?
Yes, death benefits from life insurance policies are fully exempt from TDS, regardless of the premium paid or the sum assured.
Q12. Will the reduced TDS rate under Section 194D and Section 194DA impact my tax liability?
While the reduced TDS rate will result in lower tax deduction at source, your overall tax liability remains the same. You will still need to report the income from commissions (under Section 194D) or life insurance payouts (under Section 194DA) in your income tax return, and the final tax payable will be calculated based on your total income.
Q13. What should I do if the insurance company deducts TDS under Section 194DA, but my payout is exempt?
If TDS has been deducted incorrectly, you can claim a refund by filing your income tax return. Ensure to include the details of the TDS deducted in your return to get the refund credited back.
Q14. How does the 2% TDS rate benefit insurance agents and policyholders?
The reduction in TDS rate to 2% will allow insurance agents and policyholders to receive a higher net amount upfront. It ensures less tax deduction at the source, allowing individuals to use that money throughout the year rather than waiting for a tax refund.
Q15. Is TDS applicable to both traditional life insurance policies and ULIPs under Section 194DA?
Yes, Section 194DA applies to all life insurance payouts, including Traditional Life Insurance Policies and Unit Linked Insurance Plans (ULIPs), unless exempt under Section 10(10D).
Q16. Do I need to submit any documents to the insurance company to avoid TDS under Section 194DA?
Yes, if you wish to avoid TDS, especially if your income is below the taxable limit, you must submit Form 15G or 15H to the insurance company before the payment is processed.
Q17. What is the process for obtaining a TDS certificate from the insurance company?
The insurance company will issue a TDS Certificate (Form 16A) for the amount of TDS deducted. This is typically issued quarterly, and you can use this certificate to claim credit for the TDS while filing your income tax return.
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