TDS under 194H for insurance agents

The Income Tax Act, 1961, mandates the deduction of Tax Deducted at Source (TDS) on commission or brokerage payments made to individuals or entities. Section 194H specifically governs TDS on commission income, applying to a wide range of commission-based transactions across various sectors. While insurance agents are primarily governed by Section 194D for their commission payments, Section 194H remains applicable to freelancers and other individuals receiving commission income.

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Table of Contents:

• TDS under Section 194H is Applicable to Insurance Agents?

• Applicability of TDS to Insurance Agents

• TDS Rates Under Section 194D

• Key Compliance Requirements

• Recent Changes (FY 2025-26)

• FAQs

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TDS under Section 194H is Applicable to Insurance Agents?

TDS on commissions paid to insurance agents is governed under Section 194D of the Income Tax Act. The tax is deducted when the commission paid exceeds ₹15,000 in a financial year (increased to ₹20,000 starting FY 2025-26). The TDS rates vary depending on the PAN status and the type of recipient, and compliance with deadlines for deduction and deposit is essential.

Applicability of TDS to Insurance Agents

Section 194D of the Income Tax Act governs the deduction of Tax Deducted at Source (TDS) on commissions paid to insurance agents by insurance companies or intermediaries. This section mandates that insurance companies or intermediaries, such as brokers or agents, must deduct TDS on the commission payments made to the insurance agents.

Exemption for Small Commission Payments

Insurance agents are exempted from TDS deduction if their total commission income does not exceed ₹15,000 in a financial year. This exemption applies in FY 2024-25. The government has increased the exemption threshold for FY 2025-26, setting it at ₹20,000. This change aims to reduce compliance burden for smaller agents who earn lower commission amounts and helps them avoid the complex TDS filing process.

How It Works:

• If an insurance agent earns a total commission amount of less than ₹15,000 in FY 2024-25 or less than ₹20,000 in FY 2025-26, no TDS will be deducted.

• If the commission exceeds these amounts, TDS will be applicable according to the prescribed rates.

• This ensures that small agents are not overburdened by TDS deductions, which is especially beneficial for agents with minimal earnings or occasional commissions.

  
  

TDS Rates Under Section 194D

Section 194D lays down different TDS rates based on whether the recipient has a PAN (Permanent Account Number) and the type of recipient (individual, HUF, or company). The TDS rates can differ significantly for individual agents, HUF agents, and companies.

TDS Rates Breakdown:

Recipient Type	TDS Rate (with PAN)	TDS Rate (without PAN)
Individual/HUF Agents	5%	20%
Domestic Companies (Agents)	10%	20%

Explanation:

• For Individual and HUF Agents: The TDS rate is 5% if the insurance agent provides their PAN. If the agent fails to provide their PAN, the TDS rate is increased to 20%. This higher rate for non-PAN holders exists to encourage the submission of PAN details and reduce tax evasion risks.

• For Domestic Companies (Agents): If the agent is a domestic company, the TDS rate is 10% when the PAN is provided. Without a PAN, the rate increases to 20%. Domestic companies are taxed at a higher rate compared to individuals because they are considered entities with larger-scale operations and greater capacity to comply with tax regulations.

  
  

Example:

1. Individual/HUF Agent with PAN: If an agent earns ₹25,000 in commission during FY 2025-26, the TDS deducted would be ₹1,250 (5% of ₹25,000).

2. Individual/HUF Agent without PAN: If the same agent does not have a PAN, the TDS deducted would be ₹5,000 (20% of ₹25,000).

3. Domestic Company (Agent): For a company, the TDS would be ₹2,500 (10% of ₹25,000) if PAN is provided, and ₹5,000 (20% of ₹25,000) if PAN is not provided.

These differentiated rates ensure that the tax deduction is applied according to the agent's status and encourage compliance with PAN requirements.

Key Compliance Requirements

Insurance companies and intermediaries must comply with several important requirements when deducting TDS on commission payments to insurance agents. The compliance steps include ensuring timely deduction, deposit, and proper documentation.

Timing of Deduction:

The TDS on commissions paid to insurance agents must be deducted at the time of payment or when the commission is credited to the agent’s account, whichever happens first. This ensures that tax is deducted at the earliest opportunity, making the process transparent and timely.

For example, if an insurance agent is credited ₹10,000 as commission in March 2025, the TDS must be deducted before the end of March or at the time of payment. This timing rule ensures that the agent’s income is taxed as soon as it is made available to them.

Deposit Deadline:

After the TDS is deducted, it must be deposited with the Central Government by the 7th of the following month. For instance:

• If TDS is deducted in April 2025, it must be deposited by May 7, 2025.

• This strict deadline helps maintain consistency in tax collection and ensures the smooth functioning of the tax system.

  
  

Returns and Certificates:

Insurance companies must file quarterly TDS returns to report all TDS deductions made during the quarter. This is done using Form 26Q. The form is an important part of the income tax filing process, as it records all TDS transactions for the quarter.

In addition, Form 16A is issued to the insurance agent by June 15 of the year following the financial year. Form 16A provides detailed information about the TDS deducted and is required for the agent’s tax filing process. It serves as proof of the tax deducted and allows the agent to reconcile their income and deductions with their final tax liability.

Recent Changes (FY 2025-26)

In FY 2025-26, there are two key changes related to TDS on commissions paid to insurance agents:

Threshold Increase:

The threshold for TDS exemption has increased from ₹15,000 in FY 2024-25 to ₹20,000 for FY 2025-26. This increase is aimed at reducing the burden on small agents who earn modest commissions. By raising the threshold, smaller agents are now less likely to face TDS deductions, which reduces the paperwork and complexity involved in compliance.

1. Old Threshold (FY 2024-25): No TDS if commission is less than ₹15,000.

2. New Threshold (FY 2025-26): No TDS if commission is less than ₹20,000.

This change provides a significant relief to smaller insurance agents, as it reduces their tax compliance obligations.

Simplified Compliance (Section 206AB Removal):

Another important change in FY 2025-26 is the removal of Section 206AB, which previously imposed higher TDS rates on individuals or entities who had failed to file their Income Tax Returns (ITR). Under this rule, insurance companies had to verify whether the insurance agents had filed their ITRs before deducting TDS, leading to complications and delays.

With the removal of Section 206AB, insurance companies are no longer required to verify the filing status of agents. This change simplifies the TDS deduction process and eliminates a significant compliance burden for insurance companies. The focus now remains on ensuring correct PAN details are provided and that TDS is deducted and deposited in a timely manner.

Frequently Asked Question (FAQs)

1. What is Section 194D, and how does it apply to insurance agents?

Section 194D of the Income Tax Act applies to the commissions earned by insurance agents. This section mandates that insurance companies and intermediaries must deduct TDS on the commissions paid to insurance agents. The TDS rate depends on the PAN status of the agent, with a lower rate applicable when the agent provides their PAN.

The threshold for TDS exemption has been set at ₹15,000 in FY 2024-25 and ₹20,000 in FY 2025-26. If the agent's total commission exceeds these thresholds, TDS is deducted accordingly.

2. How does the increase in exemption limit from ₹15,000 to ₹20,000 in FY 2025-26 impact insurance agents?

The increase in the exemption limit from ₹15,000 to ₹20,000 for FY 2025-26 allows small insurance agents to avoid TDS deductions if their total commission remains under ₹20,000. This change reduces the administrative burden on smaller agents, who are less likely to be subjected to TDS deductions and the related paperwork.

This exemption ensures that small-scale insurance agents who earn relatively modest commissions are not unnecessarily caught up in the TDS filing process.

3. Do insurance agents need to provide PAN to avoid higher TDS rates?

Yes. Insurance agents are required to provide their Permanent Account Number (PAN) to ensure that TDS is deducted at the applicable lower rate. If an agent does not provide their PAN, the TDS rate is increased. For individuals and HUF agents, the TDS rate without PAN is 20%, compared to 5% with PAN. Similarly, for domestic companies acting as agents, the TDS rate without PAN is 20%, compared to 10% with PAN.

It is crucial for insurance agents to ensure their PAN details are provided to avoid unnecessary higher deductions.

4. Can insurance agents claim a refund for excess TDS deducted?

Yes. If an insurance agent believes that excess TDS has been deducted, they can claim a refund by filing their Income Tax Return (ITR) for the relevant financial year. The agent must reconcile the TDS deducted, as reported in Form 26AS, with the actual tax liability when filing the return. If there is any excess TDS, it will be refunded after processing by the Income Tax Department.

5. How is TDS deducted for insurance commissions—at the time of payment or credit?

TDS on insurance commissions is deducted at the time of payment or when the commission is credited to the agent's account, whichever occurs earlier. This ensures that the deduction occurs promptly as soon as the agent’s commission is made available to them. For example, if the insurance company credits ₹5,000 to the agent's account in January, TDS must be deducted at the time of credit, even if the payment is made later.

6. What is the procedure for insurance companies to file TDS returns?

Insurance companies are required to file quarterly TDS returns using Form 26Q. This form is used to report the TDS deducted on commission payments made to insurance agents. It includes details of the agents, the amounts paid, the TDS deducted, and the respective TDS codes. Form 26Q must be submitted online, and the company must ensure that it is filed on time to avoid penalties.

7. What are the deadlines for depositing TDS with the government?

TDS deducted by the insurance company must be deposited with the government by the 7th of the following month after the deduction. For example, if TDS is deducted in April, it must be deposited by May 7. Failing to deposit TDS within the deadline could result in penalties and interest.

8. How does Form 16A help insurance agents in the tax filing process?

Form 16A is a certificate that provides a detailed summary of the TDS deducted from an agent's commission. It includes information like the amount of commission paid, the TDS deducted, and the PAN details of the agent. Insurance companies must issue Form 16A to insurance agents by June 15 of the year following the financial year. This form is essential for agents when filing their Income Tax Returns (ITR) and helps reconcile the TDS deductions made against their total income.

9. Are there any penalties for not complying with TDS regulations?

Yes, non-compliance with TDS regulations can lead to penalties and interest. If the TDS is not deducted, deposited, or filed on time, the tax authorities can impose interest under Section 201. The interest is charged at 1% per month from the due date for depositing TDS until the actual payment date. Additionally, if there is failure to issue Form 16A to the agent, the company may face a fine or penalty.

10. Is TDS applicable on commission payments to insurance agents for policies in force?

Yes, TDS applies on all commission payments made to insurance agents, regardless of whether the policy is in force or has already been issued. TDS is calculated on the total commission paid, irrespective of whether the policyholder has paid the premium or the policy has been activated.

11. How do insurance companies ensure compliance with TDS provisions?

Insurance companies typically have dedicated compliance departments or tax professionals who ensure the proper deduction and timely deposit of TDS. They also maintain accurate records of commission payments, PAN details of agents, and quarterly TDS returns. Some companies may also use automated systems to track TDS compliance and generate necessary forms (like Form 26Q and Form 16A) to ensure that everything is in order.

12. Can insurance agents opt for a lower TDS rate if they are eligible for a lower tax slab?

No, insurance agents cannot opt for a lower TDS rate based on their individual income tax slab. The TDS rates under Section 194D are fixed based on the recipient type (individual/HUF or company) and whether the PAN is provided. However, insurance agents can claim a refund of the excess TDS deducted when they file their Income Tax Return, based on their actual taxable income and applicable tax slab.