Section 194DA – TDS Rates, Procedure, Exemption & Deductions

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In India, many opt for life insurance as a smart move to protect themselves and their families, given the unpredictable future. It’s a practical step, recognizing that while we can’t foresee what’s ahead, we can certainly prepare for it with the right life insurance policy.

However, are you aware that the maturity amount received from a life insurance policy is subject to tax deducted at source (TDS)? Section 194DA of the Income Tax Act discusses TDS deducted on life insurance payments/payouts unless the policy is exempted under section 10(10D).

Under Section 194DA, the payer is legally obliged to deduct and deposit TDS to the IT department, and non-compliance can attract penalties. In this post, we will explain Sec. 194 DA so that you can better understand the 194DA TDS liabilities and avoid issues of compliance.

So, What does Section 194DA talk about?

To protect their future, people purchase insurance products from various insurers in India. However, it is important to know that TDS is imposed under section 194DA on the payment of a life insurance policy if the amount, including the bonus received at maturity, exceeds INR 1 lakh.

Let us look at the key provisions of the 194DA TDS section below.

Section 194 DA – Key Provisions

As discussed, Section 194DA deals with TDS imposed on the payment of life insurance policies. Below are some key provisions of section 194DA: 

1. Rate of TDS Deduction:

The rate at which TDS is deducted under Section 194 DA of the Income Tax Act varies depending on the life insurance policy as well as the premiums paid

2. Threshold Limit of TDS Deduction:

TDS is levied on a life insurance policy maturity only if the payment exceeds INR 1 lakh per annum (financial year).

3. When is the TDS Deducted:

It is imposed at the time of policy payment or the payment of the maturity amount.

4. For whom the TDS Doesn’t Apply:

TDS does not apply for life insurance policies that are exempted under Section 10(10D) of the Income Tax Act.

Rate of TDS Deduction Under Section 194DA

Below are the details about section 194DA TDS:

Type 

Applicable TDS rate 

Income received through insurance companies

5%
Domestic Organizations

10%

If availed without PAN

20%

Tax is deducted at the rate of 5% on only the ‘income part’ of the payment or on the amount received after deducting the premium paid towards a policy. It is increased to 20% if the deductee or the payee, who receives the net payment fails to submit the PAN details.

If the amount payable is INR 1 lakh or below, no TDS is imposed on the amount. Again, in the case of keyman insurance policies, the deductor is required to impose TDS before making the payment to the deductee.

Let’s take an example to understand the section better. Let’s say Sameer has obtained a life insurance maturity amount of INR 8 lakh. He has paid INR 3 lakh towards the policy as a total premium over 10 years of the policy term. Here, since the maturity to be received is more than INR 1 lakh, TDS will be deducted. So, a TDS of 5% will be imposed on the amount that Sameer would receive as maturity proceeds. Hence, he would receive INR 7,75,000 as maturity proceeds after deducting 5% on INR 5 lakh (INR 8 lakh minus 3 lakh) = INR 25,000.

How to Deduct and Deposit TDS? 

The first important thing is for the payer to obtain the valid PAN details of the payee (the absence of which will levy 20% TDS on the maturity proceeds). Next, the payer needs to ensure that the payment amount (income part) of the policy is above INR 1 lakh during a financial year. This is because TDS is imposed at a 5% rate on this amount if it exceeds INR 1 lakh per FY.

The payer is then required to deduct 5% TDS on the maturity proceed of the payee. It is important to deposit the TDS with the government within 30 days of the end of the month in which the TDS was deducted. The payer/deductor should also issue a TDS certificate in Form 16A to the payee and comply with the provisions of TDS u/s 194 DA to avoid penalty.

Exemptions Under Section 194DA

Few exemptions are available under section 194DA. The amount received as maturity proceeds from a life insurance policy, including the bonus, is exempt from TDS if it falls under the exempt category under Section 10 (10D).

Also, the maturity amount received after the death of a life insurance policyholder by a nominee is not subjected to TDS as it is exempted under Section 10(10D). Even the sum received as the surrender value of a life insurance policy, including bonus, is not subject to TDS as it is exempted under Section 10(10D).

Difference between Section 194D and Section 194DA 

Criteria 

Section 194D

Section 194DA

TDS imposed on

Payment of any sum deposited under a life insurance policy (excluding bonus/profit amount received by policyholders)

Payment made towards a life insurance policy not exempt under Section 10(10D) of the Income Tax Act

Coverage 

Covers any payment made under a life insurance policy

Covers payments received towards policies that do not come under the exempt category under Section 10(10D)

Applies to 

Any person

Anyone (excluding individuals and HUFs)

Deducted at the time of

At the time of payment of the maturity proceeds

At the time of payment of the maturity proceeds

How to avoid 

By submitting Form 15G/15H

By submitting Form 15G/15H (if applicable) or Form 15I

Section 194 DA – Criteria for Compliance 

Below are certain criteria of compliance requirements under the 194 DA section:

The deductor is expected to deposit the TDS amount with the government within 30 days from the end of the month in which the TDS was deducted. The deduction can be claimed by the payee/policyholder while filing an ITR.

A TDS certificate should be issued by the payer/deductor to the payee in Form 16A. This certificate should be issued within 15 days of the due date TDS deposit to the IT department.

Moreover, the deductor/payer in Form 26Q should file a quarterly TDS return and share it with the government with details deducted as well as the deposited TDS amount.

What are the Penalties for not Complying with Section 194 DA?

Complying with Section 194DA is a must for every payer if they want to avoid interests and penalties. It may also levy added tax liability to the payee if the payer doesn’t deduct the TDS. Hence, both the payer and the payee need to be mindful of the TDS deduction and adhere to section 194DA. A payee should also claim a deduction for this TDS while filing an ITR to avoid added penalties.

Below are some penalties and interest attracted due to non-compliance with Section 194 DA TDS rate: 

  • If payers do not deposit TDS to the government within the given time frame, they are imposed with a 1.5% interest rate per month till the deposits are paid
  • If the payer does not file the TDS return within the due date, they are imposed with a penalty of INR 200 per day until they file the return
  • Also, a penalty within INR 10,000 to INR 1 lakh can be levied on the payer if they offer incorrect details while depositing the TDS

Section 10(10D) Exemptions 

As discussed in Section 10 (10D), which states that amounts received under life insurance policies, including bonuses that come under the 10 (10D) section, are exempted. Let us take a look at the exemptions under the 10 (10D) section below:

  • Maturity proceeds received under Section 80DD (3) or 80DD (3) are exempted
  • Amount received under the keyman insurance policies are exempted
  • Policies that are bought after April 1, 2003, and before March 31, 2012, with premiums paid above 20% of the sum assured, is exempted
  • Further, policies bought after April 1, 2012, with premiums paid above 10% of the sum assured, are exempted
  • As per Section 80U, Life insurance policies purchased for people with disability/severe disability with premiums above 15% of the sum insured are exempted
  • Also, people suffering from diseases covered u/s 80DDB after 1st April 2013 with premiums above 15% of the sum assured are exempted

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FAQs: What does Section 194DA talk about?

What is section 194DA of income tax?

Under 194DA TDS is imposed on life insurance policy payouts at a 5% interest rate. For example, if a policyholder is expected to obtain INR 10 lakh as policy maturity of a life insurance policy, the person will receive INR 9.50 lakh. The rest of INR 50,000 will be deducted as TDS by the insurance company and deposited to the IT department.

What is the rate of TDS deduction if the PAN details of the payee are not provided?

The rate of TDS deduction will be 20% if the payee fails to provide PAN details.

Can a refund or ITR be filed after TDS is deducted?

Yes, you may submit for a refund after TDS deduction by filing an ITR.

Is TDS imposed only for Indian insurance policies under Section 194 DA?

No, TDS under Section 194 DA applies to all life insurance policies – Indian and foreign insurers.

Is TDS applicable on the premium amount paid by the insured to the insurance company?

No, TDS is not applied to the premium amount. It is imposed on the payout amount that is received as a policy benefit from the insurer.

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Mar 07, 2024
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