Section 194 DA

Section 194D of the Income Tax Act 1961 pertains to Tax Deducted at Source (TDS) on income from commissions for insurance agents. On the other hand, Section 194DA of the Income Tax Act 1961 deals with the taxation of life insurance payments (maturity or death payouts). Unless the policy is exempt under Section 10(10D) of the Income Tax Act, any payout exceeding ₹1 lakh must be subject to tax at source (TDS) under Section 194DA. Read on to learn more details.

Section 194D of the Income Tax Act 1961 pertains to Tax Deducted at...

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What are Sections 194D and 194DA of the Income Tax Act of 1961?

The Income Tax Act of 1961 introduced TDS as a way to collect taxes on various types of income, allowing the government to ensure tax revenue is collected in advance. Section 194D and Section 194DA of the Income Tax Act are two specific TDS sections targeting insurance-related earnings, whether from commissions or maturity or death payouts. These sections are crucial for insurance agents and policyholders, establishing who must deduct TDS, at what rate, and under what circumstances.

Section 194DA: Key Provisions on Tax Deduction for Life Insurance Payments

Section 194DA is a provision in the Indian Income Tax Act that mandates Tax Deducted at Source (TDS) on payments made from life insurance policies, such as maturity or death benefits, under certain conditions.

TDS on Life Insurance Payments

Under Section 194DA, any payout from a life insurance policy, including maturity benefits and death benefits, is subject to TDS. It applies only if the life insurance policy payment exceeds ₹1 lakh in a financial year. The insurance company carries out this deduction before disbursing the payout to the policyholder. The TDS rate is typically 5% on the income portion of the payout (total payout minus premiums paid). This ensures that taxes are collected upfront on these payments, streamlining tax compliance for policyholders.

Exemptions Under Section 10(10D)

Not all life insurance payouts are subject to TDS. Payments can be exempt from TDS if they meet the criteria outlined in Section 10(10D) of the Income Tax Act. The exemptions include.

Maturity proceeds

Any sum received under a life insurance policy, including the bonus, that is exempt under Section 10(10D) is not subject to TDS. This includes policies where the premium does not exceed 10% of the sum assured for policies issued after April 1, 2012.

Death benefits

Any sum received by a nominee or legal heir on the death of the policyholder, including the bonus, is exempt under Section 10(10D) and not subject to TDS, provided the policy meets the necessary conditions.

Surrender value

Any sum received as the surrender value of the policy, including bonuses, is exempt under Section 10(10D) and not subject to TDS. This applies only if the premium meets the prescribed limits.

Implications for Policyholders

With Section 194DA in place, policyholders are encouraged to review their policies for TDS applicability, especially if they plan to receive a payout shortly. Reassessing one’s life insurance policy based on the TDS implications can be helpful for tax planning, as it ensures policyholders maximise tax benefits under Section 10(10D), wherever eligible.

As a taxpayer, it's important for you to be aware of the exemptions and deductions under Section 194DA. This is to ensure you don't pay more tax than necessary. The four key provisions of Section 194DA you should remember include:

TDS RateThe TDS rate under Section 194 DA may vary depending on the policy and the premium paid.	Threshold LimitTDS is applicable only if the payment towards the life insurance policy exceeds ₹1 lakh in a financial year.
Time of DeductionTDS is to be deducted at the time of payment of the policy amount or any sum under the policy, whichever is earlier.	Non-ApplicabilityTDS is not applicable to payments made towards life insurance policies exempt under Section 10(10D) of the Income Tax Act.

Section 194D: TDS on Insurance Commission

Section 194D in the Indian Income Tax Act applies to the Tax Deducted at Source (TDS) on insurance commissions paid to agents or intermediaries who help generate business for insurance companies. Here’s a breakdown of its key aspects:

TDS Deduction on Insurance Commission

When an insurance company or any payer compensates an agent for selling, renewing, or continuing policies, they must deduct TDS under Section 194D. The applicable rate is:

5% for individuals and other non-corporate entities
10% for domestic companies
If the agent fails to provide a PAN, the TDS rate rises to 20%

This TDS deduction is calculated without additional cess or surcharge. If TDS is not deducted or remitted on time, the deductor faces penalties, including an interest rate of 1.5% per month on the overdue amount.

Exemptions and Exceptions

Not all payments to insurance agents require TDS under Section 194D. Key exceptions include:

Annual commission payments below ₹15,000
Submission of Form 15G or Form 15H for agents with nil tax liability, allowing them to avoid TDS.

Agents may also apply for lower TDS rates by submitting Form 13 to the assessing officer, allowing TDS at a reduced rate or none if approved.

Compliance Deadlines under Section 194D

The compliance requirements under Section 194D include:

Deduction and Deposit of TDS: TDS must be deducted at the time of credit or payment, whichever comes first, and deposited with the government by the 7th of the following month.
Issuance of TDS Certificate: The insurance company must issue Form 16A within 15 days of the deposit deadline, ensuring transparency for the payee.
Quarterly TDS Returns: A quarterly TDS return (Form 26Q) must be filed, detailing the deducted and deposited TDS amounts. Deadlines for quarterly filings are July 31, October 31, January 31, and May 31.

Section 194D thus ensures streamlined tax collection on commissions, supporting better tax compliance within the insurance sector and simplifying the tax process for insurers and agents.

Difference Between Section 194D and Section 194DA

CRITERIA	SECTION 194D	SECTION 194DA

Applicable to	Payment of any sum deposited under a life insurance policy (excluding sum allocated for bonuses or profits received by policyholders)	Payment made towards a life insurance policy not exempt under Section 10(10D) of the Income Tax Act
Coverage	Applies to any payment made under a life insurance policy	Applies only to payments received towards policies not exempt under Section 10(10D)
Applicable to	Any person	Any person (excluding individuals and HUFs)
Time of Deduction	Upon payment or credit, whichever comes first	Upon payment or credit, whichever comes first
Applicable Form	Form 15G/15H	Form 15G/15H (if applicable) or Form 15I

Note that Form 15G/15H is used by individuals and HUFs to declare that their income is below the taxable limit, while Form 15I is used by other taxpayers.

Procedure for Deducting and Depositing TDS under Section 194DA

The compliance requirements for deducting and depositing TDS under Section 194DA are as follows:

Obtain PAN: The payer must obtain a valid PAN from the payee.
TDS Deduction: If the payment towards a life insurance policy exceeds ₹1 lakh in a financial year, the payer must deduct TDS at the rate of 5% on the income portion of the payment.
Deposit TDS: The TDS deducted must be deposited with the government within 30 days from the end of the month in which the deduction was made. The policyholder can claim credit for this TDS while filing their income tax return.
Issuance of TDS Certificate: The payer is required to issue a TDS certificate to the payee in Form 16A within 15 days from the due date for depositing the TDS with the government.
Filing of TDS Return: The payer must file a quarterly TDS return in Form 26Q with the government, providing details of the TDS deducted and deposited.

Penalties for Non-Compliance with Section 194 DA

Non-compliance with Section 194 DA can attract penalties and interest. Listed below are the penalties for non-compliance

Interest

Payers who fail to deposit TDS within the due date are charged interest at a rate of 1.5% per month or part of a month until the deposits are made.

Penalty for late TDS return filing

In case of non-filing of the TDS return by the due date, the payer will be penalised ₹200 per day until the return is filed.

Penalty for incorrect information

If the payer provides incorrect information in the TDS return, a penalty ranging from ₹10,000 to ₹1 lakh can be levied.

Procedure for Deducting and Depositing TDS under Section 194D

The process for deducting and depositing TDS under Section 194D of the Income Tax Act includes:

Collection of PAN

The insurance company or payer should collect a valid PAN from the payee (insurance agent).

TDS Rate Application

TDS is deducted at 5% for individuals and 10% for domestic companies on the total commission. If no PAN is provided, the rate increases to 20%.

Threshold for Deduction

TDS under Section 194D is applicable only if the annual commission exceeds ₹15,000.

TDS Deposit

By the seventh day of the subsequent month, the withheld TDS must be turned in to the government. The deadline for commissions paid in March has been moved to April 30.

Issuance of TDS Certificate

The insurance company must issue Form 16A as a TDS certificate to the payee, serving as evidence of the deduction.

Compliance Importance

Ensuring TDS compliance under Section 194D prevents interest penalties and other compliance-related issues.

Penalties for Non-Compliance with Section 194D

Non-compliance with Section 194D TDS provisions may lead to the following penalties:

Interest for Late Deposits

An interest rate of 1.5% per month (or part thereof) is charged for delayed TDS deposits, calculated until the payment date.

Penalty for Delayed Return Filing

If the TDS return is filed late, a penalty of ₹200 per day applies until the return is submitted.

Penalties for Incorrect Information

Providing incorrect details in the TDS return can result in penalties between ₹10,000 and ₹1,00,000.

Effortless Tax and Estate Planning with ACKO Life Flexi Term Plan

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Adaptable Sum Assured

The sums can be changed as the person’s financial requirements change, which can be advantageous for tax management.

Flexible Policy Duration

It is a policy with flexible features that suit your long-term goals and tax strategy.

Flexible Payout Options

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Affordable Premiums

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Easy Claim Process

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Conclusion

Compliance with Section 194D and Section 194DA of the Income Tax Act is essential for avoiding penalties and additional tax burdens. Section 194D TDS requires insurance companies to deduct TDS on commission payments above the ₹15,000 threshold, while 194DA TDS mandates TDS on life insurance payouts that exceed ₹1 lakh, barring exemptions under Section 10(10D). Timely TDS deductions and deposits, along with issuing Form 16A certificates, are crucial for payers.

Policyholders must check if their maturity or surrender amounts are taxable and claim TDS credits when filing returns. Understanding and following TDS applicability rules under Section 194 of the Income Tax Act and adhering to TDS deduction rules ensures financial compliance and prevents additional liabilities.

Frequently Asked Questions

Here are the answers to the most asked common questions related to Section 194 DA:

Does TDS under Section 194DA apply to all types of insurance policies, including ULIPs?

No, 194DA TDS applies to traditional life insurance policies. For Unit Linked Insurance Plans (ULIPs), TDS may not apply, especially if they fall under section 10(10D) exemptions.

Can a policyholder calculate TDS deductions using a tool like a PLI surrender value calculator?

Yes, a PLI surrender value calculator can help estimate policy value, enabling TDS calculation under Section 194DA by deducting premiums from the payout to find the taxable portion.

What are the penalties if the TDS due date for Section 194D or Section 194DA is missed?

Missing the due date of TDS payment under 194D or 194DA incurs a 1.5% interest per month. Additionally, the penalty for late TDS return filing is ₹200 per day until filed.

How does Section 194D TDS section apply to health and general insurance commissions?

Section 194D TDS covers insurance commission for various insurance types, including health, life, and general insurance policies, with a 5-20% rate based on TDS section rules and PAN availability.

What is TDS in income tax, and why is it applicable to life insurance payouts?

TDS means tax collected at the source, aimed at ensuring advance tax collection. In the case of Section 194DA of Income Tax Act, it ensures tax on income from life insurance payouts.

Is there a specific TDS applicability rate for Section 194D if PAN is not provided?

Yes, if PAN isn’t provided under Section 194D of Income Tax Act, the TDS rate rises to 20% compared to the standard 5% for individuals or 10% for companies.