This topic is relating to problems faced by General Insurance companies providing third party insurance:-
In most of the cases the accident victim in road accidents are poor and road side people. They will receive money from insurance companies by way of third party insurance. Since they are lower income and uneducated people they do not possess PAN number and they don’t even know about Return of Income.
For deducting TDS the deductor must require PAN number, which is required for filing TDS returns.
In such a situation what is the recourse available to General Insurance Companies is discussed here with an example.
Facts of the case:
Ø Let us assume ABC Ltd is a company which provides services of general insurance.
Ø As part of their services they provide motor vehicle insurance.
Ø As per the terms and conditions, if insurer meets with an accident they have to accept third party claims.
Ø If the accident victim files a case in court of law, the compensation will be awarded by court or tribunal as the case may
Ø Since there is a long time gap between accident and settlement, there is an element of interest on the compensation awarded.
Ø The interest is for the period from the date of filing petition and to the date of disbursement of compensation.
Query:
Does the payment of interest to accident victim attract TDS?
a) What is the way out or solution in cases where the payee is not having any Permanent Account Number (PAN)?
Solution:
Applicability of Tax Provisions:
Ø The Income Tax Act, 1961 lays down the responsibility for payment of Tax on the payer of expenditure. Hence the Insurance company is liable to deduct and pay the tax to the taxation authorities
Ø Section 194A of the Act provides the tax rates for deduction and the threshold limit for deduction of tax. The normal threshold limit is Rs.5000/-. For Interest on compensation awarded by Motor Accident claim tribunal, the limit is raised to Rs.50000/- that means the company is liable for deducting tax if the interest paid is in excess of Rs.50000/-
From the above, it is concluded that the payment of Interest attracts TDS provided the amount is in Excess of Rs.50000/-
Ø However section 197A of the Act has provided an exemption based on which the company is not liable for deducting the tax provided the payee has submitted a declaration in form 15 G to the company stating that his income is below the Basic Exemption limit and not to deduct tax. A copy of Form 15G is given in the Annexure. The Basic exemption Limits are given as under………
Maximum exemption limit for assessment year 2010-2011 is
Rs.160000/- for individual (other than woman and senior citizen),
Rs.190000/- for woman below the age of 65 years and
Rs.240000/- for senior citizen (age 65 or more)
The exemption limits are subject to change.
Procedure for Submission of Form 15 G
The Accident victim has to submit Form15G in duplicate (2 copies) to New India Assurance. In turn New India Assurance has to submit one copy of declaration to jurisdictional commissioner or joint commissioner on or before the seventh day of the month next following the month in which the declaration is furnished to him.
For example- if Mr. “x” submits Form-15G on 18th May, 2008, in turn New India Assurance Company has to submit the same on or before 7th June, 2008.
b) However if the interest payable exceeds Rs.50, 000/- and total income of accident victim including the interest on compensation exceeds maximum exemption limit, the New India Assurance company must deduct TDS and have to obtain the payee PAN details, there is no other option available in this case.
Different situations of an individual (other than woman and senior citizen), are explained below for clear understanding of above provisions -
Situation-I
Interest payable is Rs.50, 000 /- or less and Section 194A does not attract and there is no need to make TDS.
Situation-II
Interest payable Rs.80, 000/- and Total income of accident victim including the interest is 140000/-
Since the interest payable exceeds 50,000/- sec 194A attracts.
How ever since the total income Rs.1, 40,000/- of accident victim is below the maximum exemption limit 160000/-. In this case there is no need to deduct TDS if the Victim submits FORM15G.
Situation-III
Interest Payable Rs.80, 000/-
Total income of victim including the interest is Rs.165000/-
Since the interest payable exceeds 50,000/- and the total income exceeds maximum exemption limit Rs.160000/-. The relaxation provided in section 197A can not be made use of and hence the company is liable to deduct TDS and must get accident victim PAN details for proper filing of TDS returns.
CAclubindia
