A Simple Guide to Understanding How Section 194 DA Applies to Life Insurance

As we draw closer to the last quarter of FY 2023-24, it is important to start educating ourselves on the nitty-gritty details of taxation in India. One of the most important topics in taxation is TDS (Tax deducted at source), but one seldom hears about the actual provision it belongs to in the Income Tax Act: Section 194. Did you know that tax deductions at source (TDS) are also required to be done on insurance commission and life insurance premium payments, just like tax deductions done at various income sources such as salary, interest income, and house rent?

In this article, we will deal with the taxation of life insurance payouts, which is covered under Section 194 DA. Being informed about Section 194 DA helps in tax planning, ensuring that you can avert any issues with tax compliance.

It's also necessary for taxpayers to be aware of any available exemptions and deductions detailed within the section to avoid excess taxation. Therefore, a deep understanding of Section 194 DA is imperative for taxpayers involved with life insurance policy payments.

Insights into Section 194DA

The Income Tax Act of 1961's Section 194DA states that any payment received by an Indian citizen due to the maturation of a life insurance policy, inclusive of bonuses, is subjected to TDS.

This rule excludes any amount that is already accounted for in their aggregate income under Section 10 (10D). Additionally, life insurance companies in India are permitted to deduct tax at the source as per this section.

The most recent revision

According to Budget 2023, for any life insurance policy (other than ULIP) bought on or after April 1, 2023, if the aggregate premium exceeds INR 5,00,000 in any fiscal year, the maturity benefit you receive will be taxable. Section 10 (10D) will not grant any exemptions in this case. However, the death benefit received by your family will still be exempt from taxation.

TDS Percentage under Section 194DA

Under this section, a 5% TDS is deducted from the maturity amount, with the caveat that the total amount of premiums paid should be subtracted from the calculation. The section also notes that if the maturity sum is below Rs 1 lakh, then a TDS deduction is not warranted.

It should be noted that without a PAN card, the TDS rate applied will be 20%, and for domestic companies, the tax rate is set at 10%.

Consider the following example:

Mr. Das was awarded a sum of Rs 9 lakh at the maturation of his life insurance policy, against which he has paid Rs 3 lakh in premiums over a decade. His policy payout is not exempt under Section 10 (10D). Under these circumstances, since Mr. Das is an Indian resident, and the maturity sum surpasses Rs 1 lakh, a 5% TDS is applicable.

Hence, according to Section 194DA, the tax payable would be Rs 30,000, which is 5% of Rs 6,00,000, leaving Mr. Das with Rs 8,70,000 post-TDS.

Who Qualifies for Reduced or No Tax Deduction?

Individuals earning commission may receive the benefit of reduced or nil TDS deduction under Section 194DA. To avail of this, one must submit Form 13 to the Income Tax Assessing Officer, who will then grant a certificate directing insurance firms to either not deduct TDS or to deduct a lesser amount. The absence of a PAN card negates these concessions.

Exemptions under Section 194 DA

Section 194 DA specifies that TDS is not required on payments made towards life insurance policies that are exempt under Section 10 (10D) of the Income Tax Act. Exemptions include maturity proceeds, death benefits, and surrender values that are not subject to TDS under Section 10 (10D).

Here is a detailed breakdown of exemptions under Section 10 (10D):

• Receipt of amounts covered under Sections 80DD(3) and 80DDA(3).
• Policies issued between April 1, 2003, and March 31, 2012, where the premium does not exceed 20% of the sum assured.
• Policies issued on or after April 1, 2012, with a premium of less than 10% of the sum assured.
• Policies from April 1, 2012, onwards for individuals with a disability as outlined in Sections 80U and 80DDB, with premiums below 15% of the sum assured.
• Proceeds from Keyman insurance policies.

Remember, these exemptions do not apply to sums received following the policyholder's death.

Compliance Obligations under Section 194 DA

Compliance with Section 194 DA entails:

• Timely TDS deduction and deposit, allowing policyholders to claim the TDS as a credit during tax filing.
• Issuance of a TDS certificate in Form 16A to the payee within a fortnight of the TDS deposit due date.
• Filing a TDS return quarterly in Form 26Q detailing the deducted and deposited TDS.

Concluding Remarks

Although TDS is mandated under Section 194DA of the Income Tax Act, certain exemptions exist. Review these carefully and apply the appropriate tax rate to ensure accurate tax calculations.

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