SECTION 194DA - TDS ON LIFE INSURANCE POLICY

TDS U/S 194DA: TDS ON PAYMENT IN RESPECT OF LIFE INSURANCE POLICY

1. What do you mean by TDS?

TDS stands for Tax Deducted at Source. TDS is a kind of tax that is deducted by the payer before making certain payments like Salary, Rent, Commission, Interest, Royalty, Professional Fees etc. to the payee.

TDS is required to be deducted at the source if the money to be paid and the money already paid exceeds a specified amount.

The Payee can claim this tax deducted by the payer while paying his income tax liability for the year, and if the TDS deducted is more than the income tax liability of the assessee then he/ she will be entitled to a refund.

The main purpose of introduction of TDS was to reduce the Tax evasion by the person receiving the income.

Note: -

Payer- A payer is a person or organization who is responsible for deducting TDS before paying the amount to Payee.

Payee- A Payee is a person or organization who receives the payment from the payee after the TDS deduction.

2.  What is TDS under Section 194DA of Income Tax Act?

Section 194DA of Income Tax Act, 1961 mandates that TDS to be deducted by the payer while making payment to resident persons in respect of life insurance policy.

3. When is TDS to be deducted under Section 194DA?

Normally the TDS is to be deducted at the time of payment or at the time of crediting the party in the books of accounts whichever is earlier, but in case of TDS u/s 194DA the TDS must be deducted at the time of payment only.

Few examples of date of deduction are: -

4. Who is required to deducts TDS under Section 194DA?

Any person who is liable to pay maturity proceeds of life insurance policy to any resident person is liable to deduct TDS under section 194DA.

NOTE: -

This section i.e. TDS on payment of maturity proceeds from life insurance is not applicable while making such payments to non-residents.

Example: -

Q. Mr. X, a resident is due to receive Rs. 4.5 lakhs on 31.03.2025, towards maturity proceeds of LIC policy taken on 01.04.2022 for which sum assured is Rs. 4 lakhs and the annual premium paid was Rs. 1.25 lakhs. Should TDS be deducted if yes them at what amount and how much?

A. Since the annual premium exceeds 10% of the sum assured in respect of a policy taken after 31.03.2012, the maturity proceeds of Rs. 4.5 lakhs due on 31.03.2025 are not exempt u/s 10(10D) in the hands of Mr. X. Therefore, tax is required to be deducted @2% u/s 194DA on the amount of income comprised therein i.e. on Rs 75,000 (Rs. 4.5 lakhs – Rs. 3.75 lakhs(premium paid)).

5. Rate of TDS under Section 194DA?

The TDS rate on life insurance payout is 5% but effective 01/10/2024 it is reduced to 2%.

NOTE: -

TDS has to be deducted on income component i.e. maturity proceeds from life insurance policy minus the premium paid till date.

6. Exemption under Section 194DA?

No TDS if: -

• The maturity proceeds are less than Rs. 1,00,000.
• If the maturity proceeds are exempt under section 10(10D).

            Section 10(10D) exemption: -

            If the premium paid is as per the limits explained in below, then maturity proceeds are exempt

• Policy is issued before 01/04/2012 then the premium paid per year should be less than 20% of the sum assured.
• Policy is issued on or after 01/04/2012 then the premium paid per year should be less than 10% of the sum assured.
• Policy is issued on or after 01/04/2013 for person with disability (u/s 80U) or person suffering from specifies disease (80DDB), then the premium paid per year should be less than 15% of the sum assured.
• ULIP taken after 01/02/2021 and premium paid is less than or equal Rs. 2,50,000.
• Life insurance taken after 01/04/2023 and the premium paid is less than or equal to Rs. 5,00,000.

7. Time limit for deposit of TDS under Section 194DA?

The due date for deposit of TDS is as below: -

8. What is the due date for filing of TDS return under Section 194DA?

TDS is to be deposited monthly on the dates mentioned above but the return is to be filed quarterly on or before the below mentioned dates: -

9. Type of TDS return & form to be issued?

TDS under this section has to filed quarterly through FORM 26Q and the deductor has to issue FORM 16A to the employee after filing of return.

10. Fees/ Penalties for Late/ Non- Filing of TDS u/s 194DA?

Following penalties/fees will be levied if there is delay in TDS deduction or delay in deposit of TDS or non-filing of quarterly return.

FREQUENTLY ASKED QUESTIONS?

Q. Is amount received on keyman insurance policy taxable?

A. YES, the amount received on keyman insurance policy is taxable and the TDS is to be deducted under section 194DA if the amount received is more than Rs. 1,00,000.

Q. Is TDS to be deducted on full amount of maturity proceeds?

A. NO, the TDS under section 194DA is to be deducted on the income portion only i.e. maturity proceeds as reduced by the amount of premium paid till date.

Q. Does TDS under Section 194DA applies to all types of insurance policies, including ULIPS?

A. NO, TDS applies to only life insurance policies and ULIPS only if they do not fall under Section 10(10D) exemption.

Q. TDS under 194DA if PAN is not provided?

A. If one fails to provide TDS, then the rate of TDS will be 20% instead of 2%.

Q. Does TDS under Section 194DA also applies to non-resident?

A. NO, TDS under Section 194DA only applies to resident persons, so non-resident persons are out of scope from this section.

Q. Is there any threshold limit for TDS under Section 194DA?

A. YES, TDS under Section 194DA applies only if the payout during the policy terms exceeds Rs. 1 lakh in a F.Y.