Section 194DA of the Income Tax Act pertains to the deduction of TDS on payments made towards the maturity proceeds of a life insurance policy. As per this provision, the insurer is required to deduct TDS at the applicable rate on the amount paid to the policyholder upon maturity of the policy. The TDS rate is determined based on the type of payee – individual or domestic business – and whether or not the payee has furnished their PAN details.
If the payee is an individual and has furnished their PAN details, TDS is deducted at the rate of 5%. However, if the payee is a domestic business and has furnished their PAN details, TDS is deducted at the rate of 10%. In case the payee does not furnish their PAN details, the TDS rate is higher at 20%.
It is important to note that if the total premium paid towards the policy during a financial year exceeds INR 1,00,000, the TDS provisions under Section 194DA become applicable. This provision was introduced to ensure that taxpayers disclose their insurance income in their tax returns and pay taxes accordingly.
Certain exemptions are available under this section. Let’s discuss these exemptions along with some examples:
- Exemption for certain insurance policies: As per Section 10(10D) of the Income Tax Act, the maturity proceeds received from life insurance policies are exempt from tax if the premium paid during the policy term does not exceed 10% of the sum assured. Therefore, TDS under Section 194DA will not be applicable in such cases.
For example, if Mr. X purchases a life insurance policy with a sum assured of INR 10 lakh and pays a premium of INR 90,000 during the policy term, the maturity proceeds received by him will be exempt from tax and TDS under Section 194DA will not be applicable.
- Exemption for certain categories of payees: TDS under Section 194DA will not be applicable if the payee is an individual or HUF (Hindu Undivided Family) and the proceeds of the life insurance policy are less than INR 1 lakh.
For example, if Mr. Y receives a maturity amount of INR 80,000 from a life insurance policy and he is an individual, TDS under Section 194DA will not be applicable.
- Exemption for certain categories of policies: TDS under Section 194DA will not be applicable in case of policies issued by the Central Government, State Government, or any other insurer approved by the Central Government.
For example, if Mr. Z receives a maturity amount from a life insurance policy issued by the Central Government, TDS under Section 194DA will not be applicable.
In conclusion, Section 194DA provides for exemptions under certain circumstances. Policyholders should be aware of these exemptions to ensure that TDS is not deducted unnecessarily. It is advisable to consult a tax expert for better understanding of the exemptions under this section.
When must TDS under Section 194DA be deducted:
According to the Union Budget 2023 proposal, TDS (Tax Deducted at Source) under Section 194DA must be deducted when the proceeds of a life insurance policy (other than a ULIP) are paid to the policyholder on or after April 1, 2023, and the total premium paid throughout the financial year exceeds INR 5,00,000.
For example, if a policyholder purchases a life insurance policy with an annual premium of INR 3,00,000 and pays premiums for two consecutive years, the total premium paid during the financial year will be INR 6,00,000 (INR 3,00,000 + INR 3,00,000). If the policy matures on or after April 1, 2023, and the policyholder receives proceeds from the policy, TDS under Section 194DA will be applicable since the total premium paid exceeds INR 5,00,000.
In such a case, the TDS will be deducted at the rate of 5% on the maturity proceeds if the payee is an individual and 10% if the payee is a domestic business. If the payee does not provide a PAN, the TDS will be deducted at a rate that is 20% higher than the applicable rate.
It is important for policyholders to keep track of their premium payments and ensure that they comply with this new rule proposed in the budget to avoid any penalty or legal issues.