Sec. 194DA: TDS, on Payment in respect of life insurance policy, to be deducted by the insurer.

Charging section: 194DA of Income Tax Act 1961.

What section 194DA says?

(Up to 31.8.2019) 194DA states, any person responsible for paying to a resident any sum under a life insurance policy, including the sum allocated by way of bonus on such policy, other than the amount not includible in the total income under section 10(10D), shall, at the time of payment thereof, deduct income-tax thereon at the rate of  1%. The TDS @ 1% is deducted at the time of payment if, Sum payable exceeds one lack.

Life InsuranceHowever in following cases no TDS shall be deducted:

1. If sum payable by the insurer to the insured does not exceed 1 Lack, or

2. If the life insurance policy proceeds are exempt u/s 10(10D), or

3. If sum is received on the occasion of death of the insured person.

Now, let us talk about the amendment made by Finance (No. 2) Act, 2019 in section 194DA.

w.e.f. 01-09-2019  the Act provides for TDS applicability @ 5% on net income earned “INSTEAD OF” TDS @1% on gross amount received at the time of receipt of Life Insurance Policy proceeds. Thus making section 194DA more rational as now only the income earned component of gross amount received shall be subject to TDS instead of entire gross amount though at an enhanced TDS rate than earlier.

Here it is pertinent to note that sec 194DA does not provide any mechanism to compute “taxable income” in case of insurance proceeds. Some experts hold the view that TDS @ 5% is to be charged on long/short term capital gain amount, as the case may be, (Considering “right to receive insurance proceeds” as “a capital asset” which the insured transfers to the insurer at the time of receiving insurance policy proceeds). Here, the resulting capital gain is to be treated as the “taxable income” out of gross insurance proceeds received and TDS @ 5% shall be deducted on such gain.

It is pertinent to note that TDS @5% shall not be attracted in above mentioned three cases.

The insurer/TDS deductor shall provide TDS certificate in form 16A to the insured/deductee against TDS deducted u/s 194DA. The deductee can claim this TDS while filing her/his Income Tax Return for the relevant Previous Year.

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5 Comments

  1. Amit Bhardwaj says:

    Sir,

    Request clarification here, any policy holder who took a life insurance policy with less than 10 times cover and now surrendered it will be subjected to 1% TDS on whole maturity proceeds ( including original /principal amount invested ).

    However, while filing taxes for this relevant FY, is he supposed to pay taxes as per his income slab on the whole amount ( i.e. premium paid plus any appreciation ) or only on the appreciation amount. logically, he should pay the taxes only on gains and not on the principal as other wise he would have paid taxes twice on that amount.

    Any clarity on this and the relevant section governing it shall be of immense help.

    Awaiting your kind revert.

    Thanks and regards,
    Amit Bhardwaj

  2. KANCHAN MALA VERMA says:

    As per your article u\s 194DA before 01.09.2019 TDS is applicable @1% on the gross total income. If an insured person received more than Rs.one lac & his gross taxable income in the slab of 30%, then the assessee has to pay TDS on adding the gross total income of insurance & pay tax on gross income received from insurance co or add-in his total income by deducting the amount of investment on 2011 in single premium insurance policy with insured 1.25% on policy amount. Please clarify urgently.

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