In this article we will take a look at section 194DA of the Income Tax Act, 1961 and understand tax calculation is made as per the section.

Introduction

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 194 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 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. As defined in the section,

‘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%.’

In short, any individual or company who pays any amount to a resident of this country any income related to insurance shall be responsible for deducting Income tax at the rate of 2% of the value of the payout and depositing the said amount with the government.

For the purpose of income tax, a resident is a person who has lived within the sovereign borders of India for a period greater than 180 days, irrespective of the nationality or the citizenship of the individual. On deducting the TDS amount, the taxpayer, or the ‘deductee’, will receive a certificate called ‘Form 16’ with the details of the deduction from the source of income or the ‘deductor’. At the end of the year when the deductee is calculating the total income tax due he or she can set off against the tax liability.

If the tax deducted is less than the total income tax payable then the amount of deduction is reduced from the total value and the difference is paid by the deductee along with his or her income tax return. If the deduction is equal to the tax liability then no further payment is required and the deductee only has to file the income tax return with the details and the form 16. If the deduction, however, is greater than the tax liability, then the deductee can claim refund from the income tax department while filing the return along with form 16.

It must be noted that 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.

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;

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

TDS Rates For Insurance Commissions

Deduction Type Rate

Any resident other than companies 5%

Domestic companies 10%

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:

TDS Certificate Period TDS Certificate Deadline

Between April and June By 30th of July

Between July and September By 30th of October

Between October and December By 30th of January

Between January and March By 30th of May

For Government Deductors:

TDS Certificate Period TDS Certificate Deadline

Between April and June By 15th of August

Between July and September By 15th of November

Between October and December By 15th of February

Between January and March By 30th of May

Additionally, 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;

The Insurance commission credit does not exceed INR 15,000.
Individuals may furnish Form 15G/15H as proof that they have no tax liability on their total income.
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.
TDS will not be exempt if the premium for the insurance is greater than 10%, 15%, or 20% depending on the situation.
Money received via Sections 80DD(3) and 80DDA(3) will not be exempt from the deduction.
Any amount of money received as a part of the Keyman insurance policy is liable to the deduction.
Any sum received after 1st April 2003 or 2012 whose premium payable exceeds 10% of the capital assured will also face deductions.

Illustration

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.

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.

Also Read,

Form 26Q – TDS Return Filing, Forms, Due Dates & Penalties

How to Pay Your TDS Online: A Step By Step Guide