Introduction:

To safeguard their financial well-being during challenging times, individuals often opt for insurance coverage for themselves and their families. However, when these policies mature and disburse funds, they serve as a vital income source. Consequently, Section 194DA of the Income Tax Act mandates a tax deduction at the source. Explore its applicability, rates, and additional details below.

The purpose of this section is to provide tax revenue to the government from the payment of life insurance policies. Tax deduction at source (TDS) is calculated at 5% for amounts above Rs. 1 lakh, however, the rate can go up to 20% if the policy holder does not have a PAN (permanent account number).

Section 194DA:

Section 194DA of the Income Tax Act 1961 was introduced in 2014 to deal with the tax consequences of the payment of a life insurance policy. For income received by individuals or Hindu Unclassified Families (HUFs), including salaries, this section provides for deduction of tax at source (TDS).

It’s crucial to understand that TDS under Section 194DA is applicable solely to non-exempt policies. Policies falling under the exemptions outlined in Section 10(10D) of the Income Tax Act, which meet specific conditions, are exempt from TDS. Put simply, if a life insurance policy is not tax-exempt, TDS under Section 194DA comes into play.

Applicability of the Section 194DA:

• Section 194DA encompasses all types of life insurance policies, spanning traditional ones, unit-linked insurance plans (ULIPs), endowment plans, and money-back plans. This provision extends to both Indian residents and non-residents.
• Engaging in insurance business, which involves the acquisition, continuation, renewal, or revival of insurance policies,
• The deduction should occur either upon crediting the amount to the payee’s account or at the time of payment, whether through cash, cheque, draft, or any other mode.
• Compensation or reward provided in the form of commission

TDS Rates under Section 194DA:

• The TDS deduction under Section 194DA varies depending on the mode of payment.
• For domestic companies, the TDS rate stands at 10%.
• In case the payer does not provide PAN (Permanent Account Number), the TDS rate increases to 20%.
• For individuals, the TDS rate is set at 5%.
• The TDS must be deducted at a rate of 5% on the “income part” of the payment (3.75% from May 14, 2020, to March 31, 2021). This implies that TDS is only applicable on the amount exceeding the total premiums paid by the insured.
• The deduction of TDS is not necessary if the total amount due remains at Rs. 1 lakh is available. However, if the person received the money under a Keeman insurance policy, they are taxable.

Exemptions:

• For LIC policies purchased after April 1, 2003, but before March 31, 2012, if the premium paid does not exceed 20% of the total guaranteed
• For policies issued on or after April 1, 2013, this exemption applies if the premium paid does not exceed 15% of the total assured, provided the individual also qualifies for disability as defined in Sections 80U and 80DDB.
• Any sum received under provisions of sections 80DD(3) or 80DDA(3)
• For LIC plans purchased on or after April 1, 2012, this exemption  will apply if the premium paid does not exceed 10% of the guaranteed amount.

Exemptions under Section 10(10D):

• Section 194DA does not apply to policies exempt under Section 10(10D) of the Income Tax Act. Such exemptions encompass policies meeting specific conditions, like those with a minimum term of 2 years or a minimum premium payment period of 5 years. Additionally, policies purchased before April 1, 2012, with premiums not exceeding 20% of the sum assured, are also exempt under this provision.
• This section includes the following exemptions:
• Any amount received under a keyman insurance policy is subject to taxation.
• In the case of LIC policies purchased for disabled or severely disabled persons as per section 80U, or for diseases mentioned under section 80DDB, a premium of more than 15% of the sum covered is provided.

Eligible Under Section 194DA:

Any individual or entity disbursing remuneration, reward, or commission to a resident Indian for insurance business must deduct tax at source (TDS) under Section 194DA.

The commission recipient gets the benefit of no deduction or reduction of TDS under Section 194DA of the Income Tax Act. However, if you want to apply, fill up Form 13 and submit it to the Assessing Officer (AO). A.O. However, if the assessees do not have PAN cards, they are not entitled to any benefits.

Procedure for the TDS Deduction:

The insurance company is liable to deduct TDS under Section 194DA. The applicable TDS amount has to be deducted from the amount allotted to the policy holder and remitted to the government within the specified period. Further, the insurer has to issue a TDS certificate to the policyholder, which can be used while computing income tax.

TDS Certificate:

The deductor or payer is obligated to provide a quarterly TDS certificate to the deductee in Form 16A. This form can be downloaded by the deductor from Traces, while the deductee can access it through their Form 26AS.

Penalty:

If the deductor fails to deduct TDS during a payment, interest is incurred. The deductor becomes liable to pay 1% interest per month or part thereof from the date when the TDS was due until the actual deduction date.

conclusion:

Section 194DA of the Income Tax Act makes an important provision to ensure that the tax revenue of the government on payment of life insurance policy TDS is computed at 5% for an amount exceeding Rs. 1 lakh, in respect of unreleased plans. Planners need to monitor this process in order to manage their budgets effectively.