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Updated on November 21, 2024 06:18:53 PM
In India, the taxation of income earned by insurance agents and brokers is an important aspect of the tax system. One of the key components of this taxation is the Tax Deducted at Source (TDS) on insurance commission. Whether you’re an insurance agent, broker, or just someone looking to understand the intricacies of tax laws, it’s crucial to know how TDS on insurance commissions works. This article will explain the concept, applicable rates, and common queries related to TDS on insurance commission.
As per Section 194D, TDS on Insurance Commission “Every person responsible for payment of any income by way of insurance commission to a resident in India is required to deduct tax at source therefrom at the rate of 5% or 10%, as the case may be”. This deducted amount is then deposited with the government on behalf of the agent or broker.
Deductor: Every person responsible to pay any income by way of insurance commission is required to deduct TDS u/s 194D. This provision shall apply to every person, i.e., Individual, HUF, Firm, Company, LLP, etc.
Deductee: TDS u/s 194D, TDS on Insurance Commission is required to be deducted only if the insurance commission is payable to a person who is resident in India.
Meaning of Insurance Commission:
Insurance Commission means any income by way of remuneration or reward (by way of commission or otherwise) for soliciting or procuring insurance business, including the continuance, renewal or revival of insurance policies.
Threshold Limit: The TDS provisions under section 194D, TDS on Insurance Commission, only apply if the total commission paid during a financial year exceeds ₹15,000. If the commission does not cross this threshold, no TDS will be deducted.
TDS Rate for Individuals & Non-Corporates: The TDS rate on insurance commission is 5% for individuals, Hindu Undivided Families (HUFs), and other non-corporate entities, provided the payment to the agent exceeds ₹15,000 during the financial year.
TDS Rate for Corporates: For corporate entities receiving commission, the TDS rate is 10% if the payment exceeds ₹15,000 in a financial year.
Example: Suppose an insurance company pays ₹50,000 as commission to an agent in a given month. The company will deduct 5% TDS, which amounts to ₹2,500. The agent will receive ₹47,500 (₹50,000 - ₹2,500). At the time of filing their tax return, the agent will report ₹50,000 as commission income and ₹2,500 as tax already paid.
Time for Deduction: The TDS u/s 194D, TDS on insurance Commission is required to be deducted “At the time of credit of such income to the account of the payee or at the time of payment, whichever is earlier”.
Time to Deposit:
TDS on Insurance Commission which is deducted u/s 194D and is required to be deposited to the central government. Time to deposit of TDS on Insurance Commission is given below:
| When TDS is deducted | When to deposit TDS |
|---|---|
| April - February | On or before 7th of next month |
| March | On or before 30th April |
For example, Tax on Insurance Commission is deducted on 15th December and needs to be deposited on or before 7th January. TDS on Insurance Commission is deducted on 21st March ; needs to be deposited on or before 30th April.
Under Section 194D of the Income Tax Act, TDS is generally applicable on insurance commission payments made to insurance agents. However, there are certain exemptions where TDS may not apply, Let's explore the exemptions:-
1. Payments to Non-Residents
Non-Residents: Section 194D does not apply to payments made to non-resident insurance agents. Instead, such payments are typically subject to Section 195, which deals with the taxation of payments to non-residents.
2. Threshold Limit of ₹15,000
No TDS Below Threshold: TDS under Section 194D is applicable only if the total commission paid to an agent exceeds ₹15,000 in a financial year. If the commission paid in a financial year is below this threshold, no TDS is required to be deducted.
3. Taxable Income Below Basic Exemption Limit
Exemption for Small Income Earners: If the total income of the agent (including commission) is below the basic exemption limit, the agent may apply for a Lower TDS deduction or exemption. This can be done by submitting a request to the Assessing Officer through a Form 13 application, which allows for a lower or nil rate of TDS.
Failure to comply with the TDS provisions under Section 194D, TDS on insurance Commission can lead to several consequences, both for the insurance company (the deductor) and the insurance agent (the deductee). These consequences may include:
1. Penalties for Non-Deduction of TDS
Interest on Late Deduction: If TDS is not deducted, or if there is any delay in deducting TDS, the insurer will be liable to pay interest. The rate of interest is 1% per month (for delay in deduction) from the date on which TDS was deductible until the date it is actually deducted.
Interest on Late Payment: If TDS is deducted but not deposited with the government within the prescribed time, interest at the rate of 1.5% per month is charged on the amount of TDS that remains unpaid.
2. Penalty for Non-Deposit of TDS
If the deducted TDS is not deposited with the government within the prescribed timeline, a penalty will be imposed under Section 271C of the Income Tax Act. The penalty may range from ₹10,000 to ₹1,00,000, depending on the severity of the non-compliance.
Additionally, the insurance company may face a penalty equal to the amount of TDS that was not deducted or deposited, if they fail to comply with TDS provisions mentioned under section 194G.
3. Disallowance of Expenses
Under Section 40(a)(ia), if the insurer fails to deduct TDS on insurance commission, the payment made to the agent will be disallowed as a business expense for the purpose of calculating taxable income. This means the insurance company cannot claim a tax deduction on the commission paid to the agent in the absence of proper TDS compliance.
4. Tax Liabilities for Insurance Agents
Tax Payment: Even if TDS is not deducted, the insurance agent is still liable to pay tax on the full commission income. They would have to include the commission income in their Income Tax Return (ITR) and pay tax according to the applicable tax slab.
TDS Credit: If the insurance company fails to deduct TDS, the agent may face difficulty in claiming the TDS as a credit in their tax returns.
At Bizfoc, we specialize in providing you the best accounting services in filing your TDS. Here are the reasons why we are known for our services to our clients on filing TDS:
In general, we assist the client to solve their queries and doubts regarding the documentation, procedures, and fees for filling out the form. Other than making your filing successful, we help you make a better decision by covering every aspect of what you actually need to get your TDS.
Understanding TDS on insurance commission is vital for insurance agents and brokers to stay compliant with tax laws and avoid any penalties. By knowing the applicable TDS rates, understanding the threshold limits, and keeping track of your commissions and TDS deductions, you can ensure smooth tax filing and avoid any future issues with the tax authorities.
For more detailed advice specific to your case, it is always best to consult a tax professional or financial advisor.
What is the threshold for TDS on insurance commission?
TDS is applicable only if the total insurance commission paid during the financial year exceeds ₹15,000.
Can the TDS rate be reduced?
Yes, under certain circumstances, you can apply to the Income Tax Department for a lower TDS rate. This is typically done through a form 13 application.
How is TDS on insurance commission calculated?
The TDS is calculated at 5% of the total commission paid, provided the payment exceeds ₹15,000 in the financial year. For corporate entities, the rate is 10%.
Is TDS applicable to all types of commissions?
TDS under Section 194D specifically applies to commissions earned from insurance business. Other types of commissions may be subject to different TDS provisions.
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