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July 15, 2020

Know all about TDS on Life Insurance Policy Receipts Section 194DA

by Mahesh Mara in Income Tax

Know all about TDS on Life Insurance Policy Receipts Section 194DA

Tax deduction at source is a means of collecting tax on income, dividends or asset sales, by requiring the payer to deduct tax due before paying the balance to the payee. In India, under the Indian Income Tax Act of 1961, income tax must be deducted at source as per the provisions of the Income Tax Act, 1961. In this article we will discuss Tax deducted at source on insurance receipts. Section 194DA deals with the scheme of deduction of tax at source from receipt of Life insurance policy.

When does section 194DA TDS on Life insurance receipts applies?

Under section 10(10D), any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy is exempt subject to fulfillment of conditions specified under the said section.

Consequently, the sum received under a life insurance policy which does not fulfill the conditions specified under section 10(10D) is taxable.

The below are the cases were section 194DA applies:

a. Amount received under sub-section (3) of Section 80DD or sub-section (3) of 80DDA of the Income Tax Act, 1961

b. Any sum received under an insurance policy issued on or after the 1st day of April, 2003 but on or before the 31st day of March, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured; or

c. Any sum received under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured.

d. Amount received is more than Rs. 1,00,000.

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What are the manner and rate of deduction of TDS under section 194DA?

A. Manner of deduction of TDS:

Tax deduction is required only if the payment or aggregate payment in a financial year to an assessee is Rs. 1,00,000 or more. This is for alleviating the compliance burden on the small tax payer

B. Rate of TDS

For ensuring  a  proper mechanism  for  reporting  of  transactions  and collection  of  tax  in respect  of  sum  paid  under  life  insurance  policies which  are  not  exempt  under  section 10(10D), section 194DA provides for deduction of tax at the rate of 1% on any sum paid  to  a resident under a life insurance policy, including the sum allocated by way of bonus, which are not exempt under section 10(10D). However, with effect from 1.9.2019, tax is to be deducted at source at 5% on the amount of income comprised therein i.e., after deducting the amount of insurance premium paid by the resident assessee from the total sum received.

Understanding with examples:

Case 1:

Mr. X, a resident, is due to receive Rs. 4.50 lakhs on 31.3.2020, towards maturity proceeds of LIC policy taken on 1.4.2017, for which the sum assured is Rs. 4 lakhs and the annual premium is Rs. 1,10,000.

Since the annual premium exceeds 10% of sum assured in respect of a policy taken after 31.3.2012, the maturity proceeds of Rs. 4.50 lakhs due on 31.3.2020 are not exempt under section 10(10D) in the hands of Mr. X. Therefore, tax is required to be deducted@5% under section 194DA on the amount of income comprised therein i.e., on Rs. 1,20,000 (Rs. 4,50,000, being maturity proceeds – Rs. 3,30,000, being the entire amount of insurance premium paid).

Case 2:

Mr. Y, a resident, is due to receive Rs. 3.25 lakhs on 31.3.2020 on LIC policy taken on 31.3.2012, for which the sum assured is Rs. 3 lakhs and the annual premium is Rs. 35,000.

Since the annual premium is less than 20% of sum assured in respect of a policy taken before 1.4.2012, the sum of Rs. 3.25 lakhs due to Mr. Y would be exempt under section 10(10D) in his hands. Hence, no tax is required to be deducted at source under section 194DA on such sum payable to Mr. Y.

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