1) Who is responsible to deduct tax u/s 194DA?
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 deduct income-tax thereon.
2) When to Deduct TDS under Section 194DA?
Tax shall be deducted at the time of payment thereof.
3) Rate of TDS under Section 194DA
The rate of tax u/s 194DA is 5% (3.75% w.e.f. 14.05.2020 to 31.03.2021) on “only Income Part” of the payment made under LIP. [Applicable from September 1, 2019] (That is after deducting the amount of insurance premiums paid by the insured person from the total sum received from Insurance Company).
In case if deductee does not provide the PAN details with the Life Insurance Companies, then there will be a TDS of 20%.
4) Threshold Limit
No deduction under this section shall be made where the amount of such payment or, as the case may be, the aggregate amount of such payments to the payee during the financial year is less than ₹1,00,000.
ILLUSTRATION– Mr. Sham took insurance policy on 26th July, 2015 for ₹ 2,20,000/-. He paid premium of ₹ 55,000/- every year. On 25th July, 2020 he received ₹ 2,50,000/- (including bonus) as the maturity proceeds. State whether TDS provisions are applicable or not.
Policy is taken after 1st April, 2012. Hence, amount of deduction allowed on premium should not exceed 10% of the sum assured. In this case, the sum assured was ₹ 2,20,000/- so amount of premium should not exceed ₹ 22,000/-. However actual premium paid (₹ 55,000/-) is more than ceiling limit (₹ 22,000/-). Hence, the proceeds are taxable.
As per Section 194DA, since the proceeds are more than ₹ 1,00,000/- TDS provisions are applicable. Hence the insurance company will deduct TDS @ 5% of ₹ 30,000/- i.e. ₹ 1,500/- while making the payment of the maturity proceeds.
5) Exemptions u/s 10 [10(D)]
As per sec 10 [10(D)] of the Income Tax Act any sum received under the Life Insurance Policy including the sum allocated by way of bonus on such policy is exempted whether received from Indian or a Foreign Company. However, this section has following exceptions to it:
There is no maximum limit for claiming the exemption under Sec 10 [10(D)] unless the above-mentioned conditions are not fulfilled. Also, the above exceptions are not applicable on death claims or any amount received on the death of the insured.
6) Points to be kept in mind
> the value of any premiums agreed to be returned; or
> any benefit by way of bonus or otherwise, over and above the sum actually assured, which is to be or may be received under the policy by any person.
ILLUSTRATION– Examine the taxability and applicability of TDS provisions in the following cases:
(i) Jasmeet, a resident received Rs. 7,50,000 on 30.04.2020 on maturity of her life insurance policy taken on 01.05.2007. The policy sum assured is Rs. 1,00,000 and annual premium being Rs. 22,500.
In this case, since the annual premium of Rs. 22,500 exceeds Rs. 20000, being 20% of the sum assured of Rs. 1,00,000, in respect of policy taken before 01.04.2012, the maturity proceeds of Rs. 7,50,000 received by Mr. Jasmeet on 30.04.2020 would not be exempt under section 10(10D) in his hands. Tax shall be deducted @ 5% on (Rs. 7,50,000 less premium Rs. 22,500 * 13 years = Rs.2,92,500) Rs. 4,57,500.
(ii) Miss Jasmine, a resident received Rs. 3,50,000 on 01.05.2020 on maturity of her life insurance policy taken on 10.04.2012. The policy sum assured is Rs. 50,000 and annual premium being Rs. 16,000.
In this case, the annual premium of Rs. 16,000 exceeds Rs. 5,000, being 10% of sum assured of Rs. 50,000, in respect of a policy taken on or after 01.04.2012 and consequently, the maturity proceeds of Rs. 3,50,000 received on 01.05.2020 would not be exempt under Section 10(10D) in the hands of Miss Jasmine. Tax shall be deducted @ 5% on (Rs. 3,50,000 less premium Rs. 16,000 * 8 years = Rs. 1,28,000) Rs. 2,22,000.
Extract of Section 194DA of Income Tax Act, 1961
194DA. 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 clause (10D) of section 10, shall, at the time of payment thereof, deduct income-tax thereon at the rate of 50[five per cent on the amount of income comprised therein] :
Provided that no deduction under this section shall be made where the amount of such payment or, as the case may be, the aggregate amount of such payments to the payee during the financial year is less than one hundred thousand rupees.