Section 194DA | TDS on Life Insurance maturity

Overview

Tax Deducted at Source (TDS) is a concept introduced by the Indian Income Tax Department to collect taxes at the source of income. When it comes to life insurance, TDS plays a significant role in ensuring that the tax on life insurance payouts is collected in a systematic manner. The Indian taxation system mandates TDS on specific types of life insurance-related transactions, which can sometimes be confusing for policyholders. This article will explain the concept of TDS on life insurance, when it applies, and how it affects policyholders.

What is Section 194DA, TDS on Life Insurance

TDS on life insurance refers to the tax deduction made by the insurance company from the proceeds of a life insurance policy. The company deducts a certain percentage of the amount payable to the policyholder before releasing the payment. This amount is then deposited with the Income Tax Department on behalf of the policyholder.

The concept of TDS in life insurance mainly applies to:

• Matured policy payouts
• Policy surrender proceeds
• Death benefits in some cases

While TDS is not applicable to every life insurance policy, it applies under certain conditions as specified by the Income Tax Act of India.

Applicability, Threshold limit and Rate of TDS under Section 194DA, TDS on Life Insurance

Applicability:

TDS Under Section 194DA, TDS on Life Insurance is required to be deducted only if:-

• Policy amount is greater than or equal to ₹1,00,000, and
• Amount should not be exempted under section 10(10D)

TDS on Life Insurance is required to be deducted only on income part of the Life Insurance Policy. What is the income part of LIP? That is, the amount which the payee will receive on maturity after deducting the premium paid.

Who shall deduct TDS u/s 194DA, TDS on Life Insurance: Any person responsible for paying to a resident any sum (maturity amount) under a life insurance policy (LIP), including the sum allocated by way of bonus on such policy, other than the amount which is exempted under section 10 (10D).

Threshold limit:

Amount or Aggregate amounts paid under section 194DA should be greater than or equal to ₹1,00,000 in a financial year.

TDS Rate:

Rate of TDS which is required to be deducted on sum paid exceeding ₹1,00,000 under section 194DA, TDS on Life insurance is 5%. With effect from 1st October 2024, This rate has been reduced to 2%.

However TDS Rate will rise to 20%, if deductee (Payee) fails to furnish PAN details.

When to deduct and deposit TDS u/s 194DA, TDS on Life Insurance

Time of TDS Deduction u/s 194DA: TDS u/s 194DA, TDS on Life Insurance is required to be deducted “at the time of payment only”.

Time to Deposit TDS u/s 194DA:

TDS on Life Insurance which is deducted u/s 194DA and is required to be deposited to the central government. Time to deposit of TDS on Life Insurance is given below:

For example, Tax on Life Insurance is deducted on 15th December and needs to be deposited on or before 7th January. TDS on Life Insurance is deducted on 21st March ; needs to be deposited on or before 30th April.

Exemptions from TDS on Life Insurance u/s 194DA

While TDS is generally applicable on certain payouts, there are exemptions:

Payment to Govt or RBI: By virtue of Section 196, no tax shall be deducted under this provision from any sum payable to the Govt., RBI, Mutual Fund or any Corporation established under the Act which is exempt from tax.

If receipts are exempt from tax: Tax is not required to be deducted if the amount payable under an Insurance Policy is exempt from tax under Section 10(10D) or the sum is received on the occasion of death of the insured person.

Payment under life insurance policy is less than ₹1 lakh: No tax shall be deducted if the gross amount paid (including bonus) in respect of life insurance policy during the financial year is less than ₹1 lakh.

Death Benefits: Death benefits under life insurance policies are typically exempt from TDS, provided the premium paid does not exceed 10% of the sum assured.

Other exemptions:

This table summarizes the conditions for tax exemption based on the premium paid and the issuance date of the LIC policy under Sections 80DD, 80DDA, 80U, and 80DDB.

Why choose Bizfoc for TDS?

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:

• Assist in suggesting the right documents for TDS filing.
• Providing valuable insights on sections of TDS computations
• Prescribe forms as per the necessity
• Helps in accurate computations for TDS computations and returns
• Tailored advice and guidelines for TDS filing

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.

Conclusion

TDS on life insurance is an important aspect for policyholders to understand, especially when it comes to receiving maturity benefits, surrender value, or death benefits. While the system ensures that taxes are collected at the source, it can sometimes lead to confusion for individuals, particularly when exemptions apply. By knowing the various conditions and understanding how to claim TDS credits, policyholders can manage their taxes effectively and avoid surprises at the time of payout.

Frequently Asked Questions? (FAQs)