TDS, which stands for Tax Deducted at Source, is a mechanism of tax collection. Normally it is the responsibility of the taxpayer to deduct tax payable from his or her income and make the payment to the government. However, there are certain incomes that have been identified where the value and source of the income is repetitively similar and subsequently so is the tax calculation. In such cases the source of the income is made responsible to calculate the tax at the prescribed rate, deduct the tax amount before the payment is made and deposit the amount with the government. This is why this mechanism is known as ‘Tax deducted at Source’.

A common example of such income is salary income, where the source of the income is the employer and hence it is the responsibility of the employer. It must be noted however that this is just an example and the mechanism is different for different incomes, depending on the nature of the income. This is why Section 194DA Of Income Tax Act has been split into several sub-sections to specify how the mechanism will work for each specific type of income on which TDS is applicable. Section 194DA of the income tax act specifically deals with commission income earned on sale of insurance. In this article we shall look at this section in detail to understand how the tax calculation and deduction takes place.

What Does Section 194D Say?

Section 194D primarily deals with the deduction of tax at source (TDS) on insurance commissions:

It is applicable on any payments made for:

• Remuneration or reward in the form of commission or otherwise,
• Procuring insurance business, including the continuation, renewal, or revival of insurance policies,
• The deduction should be made either at the time of crediting the amount to the payee’s account or at the time of payment, whether in cash, cheque, draft, or any other mode.

Note: TDS is applicable only if the amount paid or payable, or the aggregate of such income exceeds Rs. 15,000 during the financial year.

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Who is Eligible Under Section 194D?

Any individual or entity making a payment to a resident Indian in the form of remuneration, reward, or commission for the insurance business is required to deduct tax at source (TDS) under Section 194D.

The payments that fall under the provisions of TDS deduction include:

• Remuneration, reward, or commission for procuring insurance business.
• Remuneration, reward, or commission for business related to the continuance, renewal, or revival of insurance policies.

It is important to note that Section 194D applies specifically to resident individuals. In the case of non-residents, the provisions of Section 195 will be applicable for TDS deduction.

Time Limits of the Deduction of TDS for Section 194D

Tax is deducted at the earlier of the following events:

• At the time of credit of the commission in the payee’s account.
• When the actual payment is made in cash, cheque, draft, or any other mode.

Rate of TDS Deduction Under Section 194D

The rate of TDS deduction under Section 194D varies based on the type of payee:

• Individuals: The TDS rate is 5%
• Domestic companies: The TDS rate is 10%
• If the payee does not provide a PAN (Permanent Account Number): The TDS rate is 20%

It is important to note that these rates do not include surcharge and SHEC (Secondary and Higher Education Cess), as they are not applicable in this context.

The TDS must be deducted at a rate of 5% on the ‘income part’ of the payment (3.75% from 14 May 2020 to 31 March 2021). This means that TDS is applicable only on the amount exceeding the total premiums paid by the insured.

It is important to note that the TDS rate increases to 20% if the deductee fails to submit their PAN number.

No TDS deduction is required if the aggregate payable amount is within Rs. 1 lakh. However, if the person has received the amount under a keyman insurance policy, the amount is taxable.

For example, let’s consider the case of Mr. Bhat who received a maturity amount of Rs. 8 lakh from his life insurance policy. He paid a premium of Rs. 3 lakh over a period of 10 years.

In this case, since the maturity amount is above Rs. 1 lakh, the maturity proceeds will be paid after deducting 5% TDS. Therefore, the TDS amount would be Rs. 25,000 (5% on Rs. 5 lakh). After the deduction, Mr. Bhat will receive Rs. 7,75,000.

Exceptions

TDS  from the amount credited to the payee’s account in the following cases are ecempt:

• If the commission paid is less than  Rs 15,000.
• If a self-declaration is made available through Form 15G/15H. 

Penalty for Late Deduction

In case the deductor forgets to deduct TDS while making a payment, interest is applicable. The deductor is liable to pay 1% interest per month or part of a month from the day when the TDS was deductible until the actual deduction date.

Exemptions under Section 194DA

• Any sum received pursuant to sections 80DD(3) or 80DDA(3)
• For LIC policies purchased after April 1, 2003, but before March 31, 2012, if the premium paid is not more than 20% of the total guaranteed
• For LIC policies purchased on or after April 1, 2012, if the premium paid does not exceed 10% of the sum guaranteed
• For policies issued on or after April 1, 2013, if the premium paid does not exceed 15% of the total assured. This exemption applies if the person also has a disability as defined in Sections 80U and 80DDB.

Exemptions under Section 10(10D) 

According to Section 10(10D), any sum received under the LIC policy, including the amount of bonus, is exempted from tax.

This section has the following exemptions:

• Any amount received under Section 80DD(3) or 80DDA(3).
• Any amount received under a keyman insurance policy.
• For LIC policies purchased after April 1, 2003, but before March 31, 2012, if the premium paid is more than 20% of the sum assured.
• For LIC policies purchased after April 1, 2012, if the premium paid is more than 10% of the sum assured.
• For LIC policies bought for persons with disabilities or severe disabilities as per Section 80U, or for individuals suffering from ailments covered under Section 80DDB, if the premiums paid are more than 15% of the sum assured.

Note – There is no specific ceiling limit for claiming exemptions under Section 10(10D).

TDS Certificate under Section 194DA

The deductor or payer is required to issue a quarterly TDS certificate to the deductee in Form 16A. The deductor can download the form from Traces, and the deductee can view the same in their Form 26AS.

Difference Between Section 194 D and Section 194 DA

Compliance Requirements under Section 194 DA

1. Deduction and Deposit of TDS

   – The TDS (Tax Deducted at Source) deducted under Section 194DA needs to be deposited with the government within 30 days from the end of the month in which the deduction was made.

   – The policyholder can claim credit for this TDS while filing their income tax return.

2. Issuance of TDS Certificate

   – The payer is obligated to issue a TDS certificate to the payee in Form 16A within 15 days from the due date of depositing the TDS with the government.

   – The TDS certificate provides details of the TDS deducted by the payer.

3. Filing of TDS Return

   – The payer is required to file a quarterly TDS return in Form 26Q with the government.

   – The TDS return includes details of the TDS deducted and deposited during the quarter.

These compliance requirements ensure the proper deduction and reporting of TDS under Section 194DA of the Income Tax Act.

Issue of TDS Certificate

All individuals overseeing deductions must ensure timely issuance of TDS certificates, except for salary deductions.

Regarding TDS certificates for Insurance commissions, the schedule is as follows.

For Non-Government Deductions

For Government Deductions

TDS Time Limits and Deadlines

Tax Deducted at Source (TDS) is a vital component of the Indian taxation system, ensuring a steady collection of taxes. Understanding the time limits and deadlines associated with TDS is crucial for both deductors and deductees.

Deposition Deadlines

Government Deductions

If the deduction occurs by or on behalf of the government, the deposit must be made on the same day as the deduction.

Other Deductions

For deductions outside government scenarios, TDS deposition should occur within a week of the month end in which the deduction was made.

March 31 Deductions

If the deduction happens on March 31, the end of the financial year, the deposition should occur within two months of the new fiscal year.

Quarterly Processing Option

The assessing officer can choose to process the deductions quarterly, providing some flexibility in the deposition process.

Deductions under Section 194DA

TDS Exemption for Commissioned Employees

Commissioned employees can qualify for no or reduced TDS deduction under Section 197 by providing their PAN details. Failure to do so renders them ineligible for a lower tax deduction.

Exemption Limit

No TDS deduction is allowed if the total paid or credited value does not exceed ₹ 1 Lakh.

Requesting Lower Tax Rate or Exemption

Individuals can request a lower tax rate or tax exemption using Form 13, provided they obtain a Certificate of Acceptance from the Assessment Officer after successful approval.

Conclusion

While the calculation may seem rather straightforward enough above, a detailed reading of the section will reveal that there is a lot more to the calculation than just calculating a percentage on the income. This is why people are trained professionally in the field of taxation due to the complex nature and the requirement of attention to detail which can make all the difference when it comes to tax calculations. So it is always advisable to seek the assistance of a trained professional in matters related to taxation. If you have any other queries or require any assistance with regards to taxation, get in touch with us and we will ensure that our team of tax specialists get in touch with you and guide you with your requirements.

FAQs

Also, Read:

• Form 26Q – TDS Return Filing, Forms, Due Dates & Penalties
• How to Pay Your TDS Online: A Step By Step Guide
• Section 56(2)(X) of the Income Tax Act