Section 194DA of the Income Tax Act: TDS on Insurance Commission

Last Updated at: Feb 02, 2021
2745
Section 194DA of the Income Tax Act_ TDS on Insurance Commission
The upcoming Union Budget 2021 will be presented by the Finance Minister of February 1st. The Life Insurance Industry has made an important recommendation to the Government in this regard. It has requested for raising the exemption limit for TDS on insurance commission u/s 194 of the Income Tax Act. At present, the limit is Rs 15000 per annum.

 

The tax deduction is made at different income sources and on different returns, including interest income, salary, rental income. Similarly, tax deduction at source is also applied to both life insurance premium payments and insurance commissions. Section 194DA as per the Income Tax Act, 1961 contains the guidelines regarding the taxation on Insurance commissions and fees. In this article, we will take a look at Section 194DA, collection of Income Tax on insurance payments, and how a TDS certificate or receipt is used in such cases. 

  1. What is Section 194DA of the Income Tax Act?

  2. Who Deducts Tax on Insurance Commissions?

  3. TDS Rates for Insurance Commissions

  4. TDS Time Limits and Deadlines

  5. Issue of TDS Certificate 

  6. Eligibility for TDS of Insurance Commissions Under Section 194DA

  7. TDS Deduction Example

What is Section 194DA of the Income Tax Act?

Section 194DA of the Income Tax Act contains guidelines for the calculation, exemption, and collection of TDS for insurance commissions and premium payments. Any individual or firm who pays a resident any amount as a life insurance policy, bonus or additional amount not disclosed as income as per Section 10 of the Income Tax Act will have a tax deduction of 2%. However, deductions under Section 194DA will not occur if their aggregate for a whole year falls below INR 1000. Furthermore, any sum of money received as a result of the death of a senior by a legal heir is also exempt from deductions under Section 194DA.

Any individual who pays an Indian resident a remuneration for anything related to the insurance business will be liable to deduct tax as per Section 194DA. The deduction will occur at the earliest among these;

  • Credit into payee’s account
  • Actual payment is made via cheque, cash, draft or any other mode of payment

Who Deducts Tax on Insurance Commissions?

The person responsible for the deduction of tax is the person who makes payments to a resident. These payments may be in the form of remuneration or reward and are paid out either as a commission or otherwise. The payment of such commission or compensation occurs as a result of the following actions;

  1. Soliciting or procuring Insurance of any kind
  2. For help with the continuance, and renewal of insurance policies
  3. Provides support that helps with the revival of insurance policies 

File your income tax now

TDS Rates for Insurance Commissions

Sl No Type Rate
1 Any resident other than companies 5%
2 Domestic companies 10%
3 Any case with no PAN quotes 20%

Furthermore, the above-mentioned rates will not have the addition of any surcharge, SHEC, or education CESS. Hence, the TDS for insurance commission payments occur at the base rate of the source.

TDS Time Limits and Deadlines

In case the deduction is on behalf of or by the government, then the deposition of such deduction must occur on the same day. In other cases, the TDS deposition can occur within one week of the end of the month in which the deduction occurred. Also, if the deduction took place on March 31st, which marks the end of the fiscal year, then the deposition should occur within the first two months of the new financial year. Furthermore, the officer in charge of assessment has the choice to process these deductions every quarter.

Issue of TDS Certificate 

All people tasked with deductions should ensure that they issue the TDS certificates on time, except for those related to salaries. Here is a look at the timeline for the issuing of the TDS certificates for Insurance commissions.

For Non-Government Deductors:

Sl No TDS Certificate Period TDS Certificate Deadline
1 Between April and June By 30th of July
2 Between July and September  By 30th of October
3 Between October and December By 30th of January
4 Between January and March By 30th of May

 

For Government Deductors:

Sl No TDS Certificate Period TDS Certificate Deadline
1 Between April and June By 15th of August
2 Between July and September  By 15th of November
3 Between October and December By 15th of February
4 Between January and March By 30th of May

 

Also, due to the COVID-19 pandemic, the government has extended the deadline and reduced penalties regarding late filing. For delayed payment of various taxes calculated between 20th March and 30th June, the interest rate has been dropped to 9% from the existing 18% or 12%. Furthermore, no late fees and penalties shall be levied for late-payments and filings within this period.

Eligibility for TDS of Insurance Commissions Under Section 194DA

As per Section 194DA of the Income Tax Act, there is no deduction in the following circumstances;

  1. The Insurance commission credit does not exceed INR 15,000.
  2. Individuals may furnish Form 15G/15H as proof that they have no tax liability on their total income.
  3. If an interested person applies through Form No. 13, they may request for a lower tax rate and even for tax exemption. After successful approval, the individual will have to obtain a Certificate of Acceptance from the Assessment Officer. Also, this option is only available to people who have quoted their PAN on the application. 
  4. TDS will not be exempt if the premium for the insurance is greater than 10%, 15%, or 20% depending on the situation. 
  5. Money received via Sections 80DD(3) and 80DDA(3) will not be exempt from the deduction.
  6. Any amount of money received as a part of the Keyman insurance policy is liable to the deduction.
  7. Any sum received after 1st April 2003 or 2012 whose premium payable exceeds 10% of the capital assured will also face deductions.

TDS Deduction Example

If you receive INR 4.5 lakh as maturity after paying an annual premium of INR 1.10 lakhs, with the assured sum being INR 4 lakhs. In this case, since the premium exceeds 10% of the assured sum, the amount arising due to maturity is not exempt from the tax deduction. Hence, a 5% deduction will occur on the comprised income, which is the difference between INR 4.5 lakh and INR 3.3 lakh, which is the entire premium. The 5% deduction is then made on the remaining INR 1,20,000.