All You Need To Know About Section 194DA

Ever wondered why you keep a first aid kit at home? There are days when you are busy cooking, and you accidentally cut yourself. Or, your toddler might slip on a toy and scrape her knee. And you immediately run looking for a first-aid kit to apply an ointment or a bandaid. By having this kit, you don’t expect someone to get hurt, but you want to be safe, just in case. A life insurance policy also works the same way for your family. It ensures that your family is financially stable by providing a lump sum in case something unexpected happens.

When you talk about getting insurance payouts, it is essential to understand a part of the Income Tax Act called Section 194DA. This section basically says that when your life insurance policy pays out, the government deducts a portion of it as tax. This ensures that everyone pays the right amount of tax on their insurance payouts. For more insights, let's dive deeper into this in the article below-
 

What Does Section 194DA Say?

The Income Tax Act of 1961 has a provision called Section 194DA. This section deals with the taxation of life insurance payments. According to this section, if a life insurance plan is not exempt under Section 10(10D) of the Income Tax Act, any payment made towards that policy is subject to Tax Deducted at Source (TDS).
 

Key Points Of Section 194DA

Some crucial factors that you should know under Section 194DA are -

• TDS On Life Insurance Payouts
  If Section 10 (10D) does not exempt the payout received from a life insurance policy, it needs to be taxed at the source.
   
• Legal Duty
  The payer must deduct and submit the TDS to the government as per the law. If you don’t follow these rules, it can lead to fines and interest charges.
   
• Tax Strategy
  Grasping Section 194DA can aid taxpayers in managing their tax responsibilities effectively and steering clear of compliance issues.
   
• Exemptions and Deductions
  Taxpayers should be familiar with the exemptions and deductions provided under this section to ensure they don't pay more taxes than necessary.
   

Importance For Taxpayers

Understanding Section 194DA is crucial for several reasons -

• Staying Compliant
  By following and staying updated with Section 194DA, you can safeguard yourself against legal and monetary repercussions.
   
• Strategic Financial Planning
  Being informed about this section enables more effective tax planning and cleverly managing your finances.
   
• Maximising Tax Savings
  Understanding exemptions and deductions empowers taxpayers to make the most of their insurance tax benefits.
   

Main Provisions Of Section 194DA

Understanding a few significant provisions under Section 194DA -

• TDS Rate
  Under Section 194DA, the Tax Deducted at Source (TDS) rate is 5% if the payee provides their PAN. However, If you do not provide the PAN, the TDS rate increases to 20%.
   
• Threshold Limit
  TDS applies only if the payment towards the life insurance policy exceeds Rs. 1,00,000 in a financial year.
   
• Deduction Time
  The insurer deducts TDS when paying the policy amount or any sum under the policy, whichever comes first.
   
• Exceptions
  TDS does not apply to payments for life insurance policies that qualify for exemption under Section 10(10D) of the Income Tax Act.
   

Who Is Eligible Under Section 194DA?

Section 194DA concerns Tax Deducted at Source (TDS) on life insurance payouts. The following are eligible under this section -

• The Payee
  Individuals who receive payouts from a life insurance policy, except those exempt under Section 10(10D).
   
• The Payer
  This includes the life insurance company or any other entity responsible for distributing payments under a life insurance policy.
   

When To Deduct TDS Under Section 194DA?

TDS takes place at the earlier of these two instances -

• At The Time Of Credit
  The insurer, the payer, deducts TDS when they credit the commission to the payee’s account.
   
• At The Time Of Payment
  The insurance company also deducts TDS when they make the actual payment, regardless of whether it is in cash, cheque, draft, or any other mode.
   

Difference Between Section 194D And Section 194DA

Here’s a comparison between Section 194D and Section 194DA -

Rate Of TDS Under Section 194DA

The TDS rate stands at 5% and applies to the income part of your life insurance policy. It is deducted from the maturity amount you receive after subtracting the premiums you have paid for the policy. However, if you have not provided your PAN (Permanent Account Number), the TDS rate could be higher.
 

Procedure For Deducting & Depositing TDS Under Section 194DA

Here are the steps that you need to follow -

Step 1: Obtain PAN From Payee
It is important to have the payee's valid PAN (Permanent Account Number).

Step 2: Deduct TDS
When it comes to TDS, a deduction of 5% should be made only on the income portion of the payment made towards a life insurance policy. However, this deduction is applicable only if the payment amount exceeds Rs. 1 lakh in a financial year.

Step 3: Payment Upon Maturity
There is an applicable 5% TDS deduction when the maturity amount exceeds Rs. 1 lakh.

Step 4: TDS Deposit
The insurer needs to deposit the TDS deducted with the government within 30 days from the last day of the month when the deduction was made.

Step 5: Issuing TDS Certificate
The payer should provide you, the payee, with a TDS certificate in Form 16A.

Adhering to these TDS provisions under Section 194DA is crucial for the payer to avoid facing penalties and interest charges.
 

Exemptions Under Section 194 DA

The following criteria are exempt under this Section -

1. Any sum received under sections 80DD(3).
2. LIC policies purchased between April 1, 2003, and March 31, 2012, where the premiums do not exceed 20% of the total guaranteed amount.
3. LIC policies bought on or after April 1, 2012, with premiums not exceeding 10% of the sum assured.
4. Plans issued on or after April 1st, 2013, with premiums not exceeding 15% of the total assured, qualify for exemption if the individual also has a disability as defined in Sections 80U and 80DDB.
    

Deductions Under Section 194 DA

Under Section 194DA, the payer must deposit the TDS deducted from the government within 30 days from the end of the month when the deduction took place. You can claim credit for this TDS when filing your income tax return.
 

Compliance Requirements Under Section 194 DA

Here are the compliance requirements under Section 194DA -

• Deposit And Deduction  Of TDS
  The payer must deposit the deducted TDS with the government within 30 days from the end of the month when the deduction happened. You can claim credit for this TDS when filing your income tax return.
   
• Getting TDS Certificate
  The payer has to issue a TDS certificate to the payee under Form 16A within a span of 15 days starting from the due date of depositing the TDS with the government.
   
• TDS Return Filing
  The payer must file a quarterly TDS return under Form 26Q with the government, providing details of the TDS deducted and deposited.
   

Penalties For Non-Compliance With Section 194 DA

Failing to comply with Section 194DA can result in penalties and interest charges -

• Interest Charges
  Payers who do not deposit TDS within the due date face an interest rate of 1.5% per month or part thereof until the deposits are completed.
   
• Late TDS Return Filing Penalty
  If the TDS return is not filed by the due date, the payer incurs a penalty of Rs. 200 per day until the return is submitted.
   
• Penalty For Providing Incorrect Information
  Submitting incorrect information in the TDS return can lead to penalties ranging from Rs. 10,000 to Rs. 1 lakh.

Payers must adhere to Section 194DA to prevent penalties and interest charges. This is because non-compliance can lead to extra tax liability for the payee, who may need to pay additional tax to cover the TDS not deducted by the payer. Hence, it is vital for both payers and payees to follow Section 194DA. Payers should ensure timely deduction and deposit of TDS to evade penalties or interest. On the other hand, payees should claim TDS credit when filing their income tax return to prevent extra tax liability.
 

TDS Certificate Under Section 194DA

All individuals responsible for deductions must issue TDS certificates before the due date, except for salary deductions.

Timeline for TDS Certificates for Insurance Commissions

For Non-Government Deductions

• From April to June: Within July 30th
• From July to September: Within October 30th
• From October to December: Within January 30th
• From January to March: Within May 30th

For Government Deductions

• From April to June: Within August 15th
• From July to September: Within November 15th
• From October to December: Within February 15th
• From January to March: Within May 30th
   

To Conclude,

Section 194DA ensures that tax is deducted at source on certain life insurance payouts. It requires the payer to deduct TDS if the payout exceeds Rs. 1 lakh in a financial year, helping to streamline tax collection and compliance. You should be aware that you can claim credit for the deducted TDS when filing your income tax returns. Both payers and payees must understand and adhere to these rules to avoid penalties and interest. In short, Section 194DA plays an important role in maintaining tax compliance and ensuring transparency in life insurance transactions.

FAQs