Easy Office

Section 194DA: TDS on Payment of Life Insurance Policy

CA Ruby Bansal , Last updated: 22 April 2023  
  Share


Section 194D of the Income Tax Act requires tax to be deducted at source on any commission or reward paid for procuring insurance business. The deduction must be made at the time of payment or crediting of the commission.

Rate of TDS u/s 194DA

Section 194D of the Income Tax Act specifies different rates at which tax is deducted at source based on the type of payee. For individuals, the rate is 5%, while for domestic companies, the rate is 10%. If the payee does not provide PAN, the rate is higher at 20%.

Section 194DA: TDS on Payment of Life Insurance Policy

When TDS u/s 194DA is to be deducted?

As per the Union Budget 2023

As per the Budget 2023 proposal, if you purchase a life insurance policy (other than ULIP) on or after 1st April 2023 and the aggregate premium paid during the financial year exceeds INR 5,00,000, then the amount received on maturity will be taxable.

For example:

Suppose you purchase a life insurance policy in June 2023, and the premium paid in that financial year is INR 4,50,000. You purchase another policy in December 2023, and the premium paid for that policy is INR 1,00,000. The aggregate premium paid during the financial year (April 2023 to March 2024) is INR 5,50,000 (INR 4,50,000 + INR 1,00,000), which exceeds the threshold of INR 5,00,000.  And an amount of INR 22,00,000 will going to be receive on the maturity of the policy.

Then the payer is liable to deduct TDS only on the Net Income i.e. INR [22,00,000 - 5,50,000] = 16,50,000. TDS amount will be 82,500 i.e., [5% of 16,50,000].

As a result, any amount received on maturity of these policies will be taxable.

As per Union Budget 2019 

The Union Budget 2019 proposed an amendment to the Tax Deducted at Source (TDS) on insurance policy proceeds. The amendment increased the TDS rate to 20% if the PAN number of the deductee is not provided. However, there is no need to deduct taxes if the aggregate payable amount is within Rs 1 lakh.

In the case of keyman insurance policy proceeds, the amount received is taxable.

 

For example:

if a person receives a maturity amount of Rs 8 lakh from a life insurance policy after paying a premium of Rs 2 lakh over 10 years, the maturity amount is above Rs 1 lakh. Therefore, the maturity proceeds will be paid after deducting 5% TDS, which in this case would be 30,000 (5% of Rs. 6 lakh). After the deduction, the person will receive Rs 7,70,000.

Exemptions under Section 194DA

Section 194DA of the Income Tax Act requires the deduction of tax at source on payments made by an insurer to a policyholder when the policy is surrendered or when the sum assured is paid out. However, there are certain exemptions available under this section.

 
  • The first exemption is for any sum received pursuant to sections 80DD(3) or 80DDA(3). These sections relate to deductions available for medical treatment and maintenance of dependents with disabilities.
  • The second exemption applies to policies purchased between April 1, 2003, and March 31, 2012, where the premium paid is no more than 20% of the total guaranteed amount.
  • The third exemption applies to policies purchased on or after April 1, 2012, where the premium paid does not exceed 10% of the sum assured.
  • The fourth exemption applies to policies issued on or after April 1, 2013, where the premium paid does not exceed 15% of the total assured amount. This exemption only applies if the person additionally has a handicap as defined in Sections 80U and 80DDB, which relate to deductions available for disabilities and certain medical treatments.
Join CCI Pro

Published by

CA Ruby Bansal
(Finance Professional)
Category Income Tax   Report

  10778 Views

Comments


Related Articles


Loading