Section 194D and Section 194DA of the Income Tax Act
- PRITI SIRDESHMUKH
- Sep 29
- 7 min read
Tax deductions at source (TDS) must be made on insurance commissions and life insurance premium payments, much as tax deductions at other income sources like salaries, interest income, and rent. The relevant provisions are Sections 194D and 194DA of the Income Tax Act of 1961, respectively. To ensure tax conformity, Section 194D requires TDS on insurance commissions paid to agents. In order to guarantee that tax obligations are fulfilled prior to payouts, Section 194DA mandates TDS on life insurance policy maturity proceeds.
Table of Contents
What is Section 194D?
Section 194D mainly covers TDS on insurance commissions. This is mainly applicable to insurance agents working for companies such as LIC, HDFC Insurance, ICICI Insurance, etc. The section addresses any money paid through:
Any payment or incentive, whether in the form of a commission or something else,
To solicit or acquire insurance business (including business about the continuation, renewal, or resurrection of insurance policies)
The deduction needs to be made when the funds are credited to the payee's account or when the money is paid by cash, check, draft, or another method. Only when the entire amount of income received or owed during the fiscal year surpasses Rs 15,000 is it tax-deductible. The money you receive at maturity will be taxed if you buy any life insurance products (except for ULIP) on or after April 1, 2023, and the total premium paid during a fiscal year exceeds Rs. 5,00,000. No one will be granted an exception under Section 10(10D).
Eligibility for Section 194D
Tax shall be withheld by anyone who pays a resident person (individuals, Hindu Undivided Families (HUF), businesses, or other taxpayers) as compensation or a reward for their work in the insurance industry. Section 195 will apply to non-residents, while Section 194D's TDS deduction requirements are solely applicable to residents.
Exceptions under Section 194D
The amount credited to the payee's account by the payer is not subject to tax deductions in the following circumstances:
The commission paid in full would not exceed Rs 15,000 in total.
You can submit a self-declaration using Form 15G/15H.
TDS Rate under Section 194D
Section 194D states that the tax is withheld at varying rates according to the kind of payee:
HUF or individuals: 5%
10% of domestic businesses
The payer doesn't share PAN: 20%
Note that starting on April 1, 2025, this rate is expected to be lowered to 2%. Additionally, you should be aware that these rates will not be subject to the surcharge or the health and education cess.
Penalty for Late Deduction
Interest is due if the deductor fails to deduct TDS when sending a payment. Every month or for a period of six days from the day the TDS was deductible to the actual deduction date, the deductor must pay 1% interest.
What is Section 194DA?
The majority of Indians buy insurance products from companies like LIC in order to secure their future. However, many customers are not aware that TDS is imposed under Section 194DA if the policy is not exempt under Section 10(10D) and the payment for a life insurance policy, including the bonus amount at maturity, exceeds Rs 1 lakh. TDS on life insurance payouts was first proposed in the 2019 Budget for all maturity installments received on or after September 1, 2019.
Exemptions under Section 194DA
Any money obtained in accordance with section 80DD(3)
The LIC insurance was acquired after April 1, 2003, but before March 31, 2012, and the premium paid is no more than 20% of the sum guaranteed.
The premium is limited to 10% of the guaranteed sum if LIC insurance is purchased on or after April 1, 2012.
As long as the premium paid does not surpass 15% of the total guaranteed, the policy must be issued on or after April 1, 2013. It is only applicable if the individual also has a disability as specified in Sections 80U and 80DDB.
TDS Rate under Section 194DA
The "income part" of the payment is the sole part from which the 5% tax must be subtracted. It has been suggested that this rate be lowered to 2%, effective October 1, 2024. This indicates that TDS will only be applied to amounts that exceed the insured's entire premium payment. If the deductee does not furnish the PAN number, the TDS rate is raised to 20%. If the total amount payable is less than Rs 1 lakh, no tax deduction is necessary. The money is taxable if it was received by the individual under the keyman insurance policy.
Illustration: A's life insurance policy paid out Rs. 8 lakh at maturity. Over the course of ten years, the policy premium paid by A was Rs 3 lakh. In this case, the maturity amount exceeds Rs 1 lakh. Therefore, before the maturity amount is received, 5% TDS will be deducted. In this case, Rs 25,000, or 5% of Rs, would be the TDS. A will receive Rs 7,75,000 after deduction.
TDS Certificate under Section 194DA
Every quarter, the deductor or payment will provide the deductee with a TDS certificate on Form 16A. The deductor can examine the form on their Form 26AS after downloading it from the Traces.
Difference Between Section 194D and Section 194DA
Particulars
| 194D
| 194DA
|
Applicability | Applicable to insurance commission paid for procuring Insurance business | Applicable to payment in respect of life insurance policy |
Who Deducts | Any individual who is in charge of giving a resident money in exchange for seeking or acquiring insurance business (including business pertaining to the continuation, renewal, or revival of insurance policies), whether through commissions or other means | Anyone in charge of paying a resident any amount (maturity amount) under a life insurance policy, including the bonus amount granted under the policy, excluding the amount excluded from total income under section 10's clause (10D) |
When it is deducted | When the income is credited to the payee's account or when it is paid in cash, by cheque, draft or another method, whichever comes first | At the time of payment thereof |
Limit | Rs. 15,000 | Rs. 1,00,000 |
Rate | Individuals or HUF: 5% (proposed to be reduced to 2% with effect from 1st April 2025)Domestic companies: 10%Payee does not provide PAN: 20% | 5% only on the income portion of the life insurance policy, which is the sum that the policyholder will get upon maturity after the premium has been subtracted. It has been suggested that this rate be lowered to 2%, effective October 1, 2024. |
Exemption | The commission paid does not exceed Rs 15,000.A self-declaration is available through Form 15G/15H. | The premium paid for any amount obtained under section 80DD(3) or 80DDA(3)LIC insurance must not exceed 20% of the sum assured and must be purchased after April 1, 2003, but no later than March 31, 2012.When purchasing a LIC policy, the premium must not exceed 10% of the total assured and must be paid on or after April 1, 2012. if the premium paid does not exceed 15% of the total assured and the policy is issued on or after April 1, 2013. It only applies if the individual in question also has a handicap as defined by Sections 80U and 80DDB. |
Budget 2024 Updates
The proposed reduction of the TDS rate on insurance premium commissions and payment of life insurance policy under Sections 194D and 194DA from 5% to 2% aims to increase taxpayer compliance and the convenience of doing business. Section 194D's lower TDS rate will take effect on April 1, 2025, while Section 194DA's updated rate will take effect on October 1, 2024.
Budget 2025 Updates
The threshold amount for tax deduction under section 194D has been raised from Rs. 15,000 to Rs. 20,000 in the budget 2025, with effect from April 1, 2025.
Conclusion
In conclusion, section 194D discusses the tax ramifications of the commission that the insurance salesperson receives after selling the policy. A 5% tax will be applied to the agent's guaranteed commission income if it exceeds the maximum threshold, which is Rs 15000 per year. Section 194DA, on the other hand, addresses LIC withdrawals and stipulates that there would be 1% TDS applied to LIC withdrawals that are taxable under the IT Act if the withdrawal amount exceeds Rs 1,00,000.
FAQs
Q1. Who should deduct tax under Section 194D?
Section 194D requires tax deductions for anybody who pays a commission for recruiting insurance business, including commissions for new, continuing, renewal, or revival insurance policies.
Q2. What is the threshold up to which no tax needs to be deducted u/s 194D?
If the total amount of insurance commission paid during a fiscal year is less than Rs. 15,000, no tax must be withheld.
Q3. When should the tax be deducted under section 194DA?
Tax should be subtracted when the payee receives the amount that was promised.
Q4. What is the threshold limit for 194DA?
TDS is only chargeable under Section 194DA if the total amount received at the time of payout in a fiscal year is more than Rs. 1 lakh. TDS is not necessary for payments under one lakh rupees.
Q5. Is TDS u/s 194D deductible on the reinsurance commission?
No, section 194D does not apply to reinsurance commissions.
Q6. What is the percentage of TDS on commission?
The TDS deduction rate is five percent.
Q7. Is TDS applicable to incentives paid to employees?
Yes, if the assessee's total income surpasses the entire amount not subject to tax, TDS is withheld.
Q8. What is the tax on commission?
The commission TDS is 5%.
Q9. Is GST applicable to commission income?
GST is applied to commission income at the specified rates.
Q10. Who should deduct TDS on commission?
Tax deductions on commission payments are due to the person who is responsible for paying any kind of commission or brokerage.
Q11. What is the threshold limit for TDS on commission?
The threshold level for TDS on commission is Rs. 15,000.
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