What is Section 194D and Section 194DA
Similar to tax deductions done at various income sources such as salary, interest income, and house rent, tax deductions at source (TDS) is also required to 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:
What does Section 194D say?
Insurance can go a long way when it comes to mitigating the financial crunch caused due to medical emergencies. Therefore, it is advisable to take an insurance policy not only for oneself but for one’s dependents as well. Most times people choose their insurance via agents, brokers, etc. In such cases, the insurance commission or any other remuneration/reward received by such agents, brokers etc., are subjected to Tax Deducted at Source (TDS) as dictated under Section 194D of the Income Tax Act.
Eligibility of deduction under Section 194D
The tax must be deducted by the entity who makes the payment to the resident person, as remuneration/ rewards, by the way of commission or for the following purposes:
- Soliciting or obtaining insurance business
- Continuance, renewal or revival of policies of insurance.
Note that this provision applies from 1st June 1973 onwards.
When is TDS deducted under Section 194D?
The deduction of tax on insurance commission under Section 194D based on which of the following comes earlier:
- Tax is deducted at the time of credit of commission in the account of the payee, or
- The payment is in cash or cheque or kind.
What is the rate of TDS under Section 194D
Section 194D is applicable for all such payments made to a resident whether they are an individual, company or any other category of persons. The rate of TDS are mentioned below:
Details | Rate of TDS |
Persons other than a company | 5% |
Domestic Company | 10% |
The TDS rate under section 194D was 3.75% for non-company deductees and 10% for domestic company deductees for payments from 14th May 2020 until 31st March 2021.
- Surcharge or SHEC will not be added to these rates. Therefore, the tax will be deducted at the source at the basic rates mentioned above.
- The rate of TDS will be 20% in cases where the deductee has not quoted PAN.
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 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.
When is TDS not liable to be deducted under 194D?
There are two instances when TDS is not deducted under Section 194D:
- Commission paid does not exceed Rs.15,000
- Self-declaration under Form 15G/ 15H
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.
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 a 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 5% TDS.
In this case, the TDS would be Rs 25,000 (5% on Rs. 5 lakh). After deduction, Mr V will receive Rs7,75,000.
No or lower tax deduction
The deductee/recipient will receive TDS certificates summarising the insurance commission payments and the TDS thereon.
Exemptions under section 10(10D)
According to section 10 (10D), any sum received under the LIC policy including the amount of bonus is exempted.
This section has the following exemptions:
- Any amount received under section 80DD (3) or 80DDA (3).
- Any amount received under a keyman insurance policy
- LIC policy is bought after 1st April 2003 but before 31st March 2012 and premium is more than 20% of the sum assured.
- LIC policy is bought after 1st April 2012 and the premium paid is more than 10% of the sum assured.
- LIC policies bought for persons with disability or severe disability according to section 80U, or for individuals suffering from ailments covered under section 80DDB after 1st April 2013, and the premiums are more than 15% of sum assured.
There is no ceiling limit for claiming exemption under section 10(10D) unless the above-mentioned conditions are satisfied.
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