Section 194DA: A Guide to TDS on the Payment of Life Insurance Policy
The majority of Indians purchase insurance products from insurers like LIC in order to safeguard their future. People are unaware, meanwhile, that they are subject to TDS under section 194DA if they receive payment for a life insurance policy that includes a bonus amount that exceeds Rs. 1,00,000 upon maturity. The Income Tax Act of 1961's Section 194DA addresses the taxation of life insurance proceeds. Any payment towards a life insurance policy shall be subject to tax at source (TDS) unless the policy is exempt under Section 10(10D) of the Income Tax Act.
Understanding Section 194DA is crucial because it requires the payer to legally deduct and deposit the TDS with the government. The terms of this section may be violated, with penalties and interest assessed. Furthermore, by comprehending Section 194DA, taxpayers can better plan their tax obligations and steer clear of compliance problems. Here is all you need to know about Section 194DA TDS deductions and exemptions.
Table of Contents
Rate of TDS under Section 194DA of the Income Tax Act
Only the income portion of the life insurance policy—that is, the amount the payee will get at maturity after the premium is deducted—is subject to TDS deductions at the rate of 5% by the payer. Domestic companies are subject to a TDS rate of 10% while the rate is higher at 20% for a payee not providing PAN for the transaction.
How to calculate income tax under section 194DA?
As an example, suppose Mr. X paid a premium of INR 3,00,000 and received INR 10,00,000 upon the policy's maturity. The payer would then only be required to deduct TDS on the net portion of income, or INR 7,00,000. The payer will in this instance deduct a TDS of INR 35,000 (or 5% of INR 7,00,000).
Exemptions and Deductions under Section 194DA
Payments for life insurance policies exempt under Section 10(10D) of the Income Tax Act are not subject to the exemptions granted under Section 194 DA, TDS. These are not limited to.
Maturity proceeds: TDS does not apply to any amount—bonus included—received under a life insurance policy that is exempt under Section 10(10D).
Death benefits: Section 10(10D) exempts from TDS any amount received by a nominee or lawful heir upon the policyholder's death, including bonuses.
Value of surrender: Any amount, including bonuses, received as the policy's surrender value is exempt from TDS under Section 10(10D).
Who deducts TDS under section 194DA?
If LIC or any other service provider pays an Indian resident for a life insurance policy, they are required to deduct TDS if the payment exceeds the designated threshold.
When to deduct TDS under section 194DA?
The payer is required to deduct TDS under Section 194DA if the maturity amount—including the bonus amount—exceeds the total limit of INR 1,00,000 within the financial year.
TDS certificate under Section 194DA
A quarterly TDS certificate in form 16A must be sent to the deductee by the deductor or payment. The form can be downloaded by the deductor from Traces, and the deductee can view it on their form 26AS.
How TDS is Deducted and Deposited?
The following is the process for deducting and depositing TDS according to Section 194DA:
The payee must provide the payer with a current PAN.
If the payer's income part of the life insurance policy payment exceeds Rs. 1 lakh in a financial year, TDS at the rate of 5% will only be subtracted.
The maturity proceeds are paid after deducting 5% TDS if the maturity amount exceeds Rs. 1 lakh.
Within 30 days of the end of the month the deduction was made, the TDS must be deposited with the government.
To avoid fines and interest, the payer must abide by the TDS requirements under Section 194 of the DA and provide the payee with a TDS certificate on Form 16A.
Compliance Guidelines for Section 194DA
The following are the conditions for compliance under Section 194 DA:
TDS deduction and deposit: Within 30 days of the end of the month in which the deduction was made, the TDS must be submitted to the government. Credit for this TDS may be claimed by the policyholder when submitting their income tax return.
TDS certificate issuance: Within 15 days of the deadline for submitting TDS to the government, the payer must provide the payee with a TDS certificate in Form 16A.
TDS return submission: The payer has to submit a Form 26Q quarterly TDS return to the government, outlining the TDS that was deposited and withheld.
Penalties for Non-Compliance
Section 194 DA nonc-ompliance is punishable by fines and interest. The consequences of non-compliance are shown below.
Interest: Payers will be assessed interest at a rate of 1.5% per month or a fraction of a month until the TDS is deposited if they are unable to deposit it by the deadline.
Penalty for filing a TDS return after the deadline: The payer will be fined Rs. 200 every day till the return is filed if the TDS return is not filed by the deadline.
Penalty for inaccurate information: A penalty of between Rs. 10,000 and Rs. 1 lakh may be assessed if the payer submits an improper TDS return.
Conclusion
Payers must abide by Section 194 of the DA to avoid fines and interest. In addition, non-compliance may result in increased tax obligations for the payee, who may be required to pay more taxes to compensate for the TDS that was not deducted by the payee. Section 194 DA must be followed by payees as well as payers. To avoid fines or interest, payers must make sure TDS is taken out and deposited on schedule. To prevent further tax obligations, payees must make sure they include a claim for credit for the TDS deducted when submitting their income tax return. Penalties and interest for violating Section 194 DA may be incurred, increasing the tax obligation of both payers and payees.
FAQ
Q1. Are life insurance policy maturity proceeds liable to TDS under Section 194DA?
No, only the amount received as a payout during the policy period is subject to TDS under Section 194DA. Proceeds from life insurance are exempt from TDS under this provision.
Q2. Does TDS under Section 194DA apply only to Indian insurance policies?
No, regardless of whether life insurance contracts are issued by foreign or Indian insurance companies, TDS under Section 194 DA applies to all of them.
Q3. Is there any threshold limit for TDS under Section 194DA?
Yes, only if the payment amount paid during the policy period surpasses Rs. 1 lakh in a financial year will TDS under Section 194 DA become payable. There is no need for TDS when payments are less than Rs. 1 lakh.
Q4. Is it possible to adjust the TDS deducted under Section 194DA against the final tax liability?
Yes, when the payee files their income tax return, the TDS deducted under Section 194DA may be offset against their final tax bill.
Q5. What occurs if the real tax amount is less than the TDS deducted under Section 194DA?
The payee may be eligible for a refund if the TDS deducted under Section 194DA exceeds their actual tax liability. As they file their income tax return, this is happening.
Q6. How to calculate income tax under section 194DA?
If the payer's income component of the payment for the life insurance policy exceeds Rs. 1 lakh in a fiscal year, TDS at the rate of 5% will only be subtracted. The maturity funds are given after subtracting 5% TDS if the maturity amount exceeds Rs. 1 lakh.
Q7. How does Section 194DA impact taxation for policyholders in the event of maturity or surrender of life insurance policies?
Section 194DA mandates the deduction of TDS at the rate of 5% on any sum paid under a life insurance policy, including bonus, if the amount exceeds Rs. 1 lakh. This impacts policyholders as TDS is deducted at the source, reducing the amount received.
Q8. Are there specific criteria or conditions under which Section 194DA applies to life insurance payouts?
Yes, Section 194DA applies when the sum paid under a life insurance policy exceeds Rs. 1 lakh. This includes amounts received on maturity, surrender, or partial withdrawal of policies.
Q9. Can individuals claim any exemptions or deductions under Section 194DA for life insurance proceeds?
No, individuals cannot claim any exemptions or deductions under Section 194DA. The TDS deducted under this section is final tax liability for the policyholder.
Q10. How does Section 194DA differ from other TDS provisions in the Income Tax Act concerning life insurance?
Section 194DA specifically applies to life insurance payouts exceeding Rs. 1 lakh and mandates a TDS rate of 5%. In contrast, other TDS provisions may apply to different types of income with varying rates.
Q11. Are there any recent updates or amendments to Section 194DA that policyholders should be aware of?
As of the latest information available, there have been no significant updates or amendments to Section 194DA. However, policyholders should stay updated with any changes in tax laws that may affect their life insurance proceeds.
Q12. Is Section 194DA taxable income?
Any payment given to a citizen upon the maturity of their life insurance plan is required to be tax deductible at the time of payment, in accordance with Section 194DA of the Income Tax Act.
Q13. Who is eligible for a lower or no tax deduction?
According to Section 194DA of the Income Tax Act, a commission earner receives no TDS deduction or a reduced amount. But in order to get it, you have to fill out Form 13 and give it to the Assessing Officer (AO). Insurance firms are authorised by the AO to deduct TDS exclusively, or to deduct a minimum amount only. Assessees do not, however, receive any benefits if they do not possess a PAN card.
