Section 194DA: TDS on Payment in respect of Life Insurance Policy

Extract of Section 194DA TDS on Payment in respect of Life Insurance Policy

Section 194DA: Any person responsible for paying to a resident any sum under a life insurance policy, including the sum allocated by way of bonus on such policy, other than the amount not includible in the total income under clause (10D) of section 10, shall, at the time of payment thereof, deduct income-tax thereon at the rate of  [five per cent on the amount of income comprised therein] :

Provided that no deduction under this section shall be made where the amount of such payment or, as the case may be, the aggregate amount of such payments to the payee during the financial year is less than one hundred thousand rupees.

Summary of Section 194DA of the Income Tax Act

1) Who is responsible to deduct tax under section 194DA of Income Tax Act, 1961?

• Any person responsible for paying to a resident any sum under a life insurance policy, including the sum allocated by way of bonus on such policy, other than the amount not includible in the total income under section 10(10D), shall deduct income-tax thereon.

2) When to Deduct TDS?

• At the time of payment.

3)What is the Rate of TDS?

• The rate of tax u/s 194DA is 5% on “only Income Part” of the payment made under LIP. (That is after deducting the amount of insurance premiums paid by the insured person from the total sum received from Insurance Company).
• In case if deductee does not provide the PAN details with the Life Insurance Companies, then there will be a TDS of 20%.

4) Threshold Limit U/s 194DA

• No deduction under this section shall be made where the amount of such payment or, as the case may be, the aggregate amount of such payments to the payee during the financial year is less than ₹1,00,000.

EXAMPLE– Mr. A took insurance policy on 25th June, 2015 for ₹ 2,40,000/-. He paid premium of ₹ 60,000/- every year. On 25th June, 2020 he received ₹ 2,70,000/- (including bonus) as the maturity proceeds. State whether TDS provisions are applicable or not.

Policy is taken after 1st April, 2012. Hence, amount of deduction allowed on premium should not exceed 10% of the sum assured. In this case, the sum assured was ₹ 2,40,000/- so amount of premium should not exceed ₹ 24,000/-. However actual premium paid (₹ 60,000/-) is more than ceiling limit (₹ 24,000/-). Hence, the proceeds are taxable.

5) Exemptions u/s 10 [10(D)]

As per sec 10 [10(D)] of the Income Tax Act any sum received under the Life Insurance Policy including the sum allocated by way of bonus on such policy is exempted whether received from Indian or a Foreign Company. There is no maximum limit for claiming the exemption under Sec 10 [10(D)] unless the below-mentioned conditions are not fulfilled.  Also, the below exceptions are not applicable on death claims or any amount received on the death of the insured. However, this section has following exceptions to it:

• Any sum received under section 80DD (3) or 80DDA (3).
• Any sum received under a Keyman Insurance Policy.
• If Policy is bought after 1st April 2003 but before 31st April 2012: the premium paid is 20% more than the sum insured.
• If Policy is bought after 1st April 2012: the premium paid is 10% more than the sum insured.
• Life insurance policy bought for the persons with disability or person with severe disability as per section 80U or those suffering from ailments or disease as specified in section 80DDBafter 1st April 2013 if premiums are more than 15% of sum assured.

6. When a declaration is submitted in form 15G/15H u/s 197A:

If a declaration is submitted u/s 197A by the recipient to the payer along with his/her PAN, then no tax is deductible

Points to be kept in mind

• For the purpose of calculating the actual capital sum assured, the following shall not be taken into the account:

> the value of any premiums agreed to be returned; or

>  any benefit by way of bonus or otherwise, over and above the sum actually assured, which is to be or may be received under the policy by any person.

• Any amount received from the Foreign Life insurance company is also eligible for deduction.
• Keyman insurance policy means a life insurance policy taken by a person on the life of another person who is connected to the business as an employee or other capacities, either in the present or in the past.
• It may be noted that while computing the amount taxable out of the maturity proceeds, the premium paid by the assessee shall be excluded

ILLUSTRATION– Examine the taxability and applicability of TDS provisions in the following cases:

(i) Mr. B, a resident received Rs. 7,50,000 on 30.04.2020 on maturity of her life insurance policy taken on 01.05.2007. The policy sum assured is Rs. 1,00,000 and annual premium being Rs. 22,500.

In this case, since the annual premium of Rs. 22,500 exceeds Rs. 20000, being 20% of the sum assured of Rs. 1,00,000, in respect of policy taken before 01.04.2012, the maturity proceeds of Rs. 7,50,000 received by Mr. Jasmeet on 30.04.2020 would not be exempt under section 10(10D) in his hands. Tax shall be deducted @ 5% on (Rs. 7,50,000 less premium Rs. 22,500 * 13 years = Rs.2,92,500) Rs. 4,57,500.

 (ii) Miss C, a resident received Rs. 3,50,000 on 01.05.2020 on maturity of her life insurance policy taken on 10.04.2012. The policy sum assured is Rs. 50,000 and annual premium being Rs. 16,000.

In this case, the annual premium of Rs. 16,000 exceeds Rs. 5,000, being 10% of sum assured of Rs. 50,000, in respect of a policy taken on or after 01.04.2012 and consequently, the maturity proceeds of Rs. 3,50,000 received on 01.05.2020 would not be exempt under Section 10(10D) in the hands of Miss Jasmine. Tax shall be deducted @ 5% on (Rs. 3,50,000 less premium Rs. 16,000 * 8 years = Rs. 1,28,000) Rs. 2,22,000.