Section 194DA: Taxation Of Payment Received From Life Insurance Plans

To ensure financial security at the time of adversity, people get insurance for themselves and their family members. However, when an individual gets an amount upon maturity, it acts as their source of income. So, Section 194DA of the Income Tax Act levies a tax deduction at source. Learn about its applicability, rates, and other details here.

What Is Section 194DA?

According to Section 194DA of the Income Tax Act, 1961, a payment received by an Indian resident upon the maturity of a life insurance plan, including the bonus, will be subject to TDS or tax deduction at source.

That said, this excludes an amount recorded in their total income under Section 10 Clause 10D. Moreover, persons making payment can deduct tax at source under this Section.

What Is the Rate of TDS under Section 194DA?

The rate at which TDS is deducted on the maturity amount is 5%. However, taxpayers must deduct their total premium amount paid during computation. Also, this Section mentions that if the maturity amount is less than Rs. 1 lakh, then no TDS shall be deductible.

Note that if an assessee does not have a PAN card, the applicable rate will be 20%. Furthermore, if a taxpayer is a domestic company, the tax rate should be 10%.

Let us understand this with an example:

Suppose Mr. Singh receives an amount of Rs 9 lakh upon the maturity of his life insurance policy. However, the premium paid throughout 10 years amounts to Rs. 3 lakh. In such a case, a TDS of 5% will be deductible since Mr Singh is an Indian resident, and the maturity amount exceeds the limit of Rs. 1 lakh.

So, as per Section 194DA of the Income Tax Act, the taxable amount is coming as Rs. 30,000 (5% of 6,00,000). Thus, Mr. Singh will receive a maturity amount of Rs. 8,70,000 after TDS deduction.

Also Read: Capital Gains Tax On Sale Of Property

Who Is Eligible for No or Lower Tax Deduction?

A commission earner benefits from no or lower TDS deduction under Section 194DA of the Income Tax Act. However, to claim it, one must fill up and submit Form 13 to the Assessing Officer (AO). The AO provides a certificate that authorises insurance companies to not deduct TDS or deduct a minimum amount only. However, if assessees do not have a PAN card, they get no benefits.

What Is Covered under the Exemption of Section 10(10D)

Under Section 10(10D), these are the exemptions on the amount received under a life insurance policy:

If policyholder get sum covered under Section 80DD(3) and 80DDA(3)
A policy is issued any day between April 1 2003, and March 31 2012, and the premium amount is less than 20% of the sum assured.
A policy is issued on or after April 1 2012, and the premium amount is less than 10% of the sum assured.
If a policy is issued on and after April 1 2012, and the person has some disability as mentioned under Section 80U and 80DDB, and the amount of premium is less than 15% of the sum assured.
If an amount received is against Keyman insurance policy.

Keep in mind that these exemptions are not applicable if someone gets a sum upon the death of the policyholder.

Also Read: Tax Deductions Under Sections 80C To 80 U

Final Word

While dealing with a life insurance maturity value, remember that tax is deductible at source under the Section 194DA of the Income Tax Act. However, as mentioned above, there are certain exemptions, so scroll through them and make sure to exclude them. Next, apply the correct rate for avoiding any mistake in tax calculation.

Frequently Asked Questions

1. What is tax deduction at source?

GOI introduced this system to collect tax from the source of their income. So, they do not have to depend on the person receiving an amount to pay tax to the Central Government. Instead, a person making a payment makes the tax payment by deducting an amount beforehand.

2. Is TDS applicable when a non-resident receives the maturity amount of life insurance?

Yes, if non-residents receive the maturity amount of a life insurance policy, they too will receive payment after TDS deduction. However, this guideline comes under Section 195 of the Income Tax Act.

3. What is the TDS return filing date for 2022?

Assessees must file their TDS return quarterly by issuing Form 26Q. The due dates are as follows:

Quarter 1 (from April to June): July 31
For quarter 2 (July to September): October 31
Quarter 3 (from October to December): January 31
Last quarter (from January to March): May 31

4. Who is responsible for deducting TDS during Insurance payout?

The person who is making a payment to their policyholder is responsible for deducting TDS when they are making the payment. These payments can be a reward, remuneration or commission of any kind.

5. What is the time limit for depositing TDS?

When depositing a TDS amount to the government, make sure you complete it within these deadlines:

When the said deduction has taken place, one must deposit it within the 7th day from the end of the month in which TDS was deducted.
If an insurance company made deductions in March, one must deposit TDS before April 30.

Note that the officer in charge has the option of assessing these deductions every quarter.

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