Under section 194DA of the Act, a person is obliged to deduct tax at source, if it pays any sum to a resident under a life insurance policy, which is not exempt under sub-section (10D) of section 10. The present requirement is to deduct tax at the rate of one per cent. of such sum at the time of payment. Several concerns have been expressed that deducting tax on gross amount creates difficulties to an assesse who otherwise has to pay tax on net income (i.e after deducting the amount of insurance premium paid by him from the total sum received). From the point of views of tax administration as well, it is preferable to deduct tax on net income so that the income as per TDS return of the deductor can be matched automatically with the return of income filed by the assessee. The person who is paying a sum to a resident under a life insurance policy is aware of the amount of insurance premium paid by the assessee. Hence, it is proposed to provide for tax deduction at source at the rate of five per cent. on income component of the sum paid by the person.

This amendment shall be effective from 1st September, 2019.

[Clause 44]

Extract of Clause 44 of Finance Bill 2019

44. Amendment of section 194 DA.

In section 194DA of the Income-tax Act, for the words “one per cent.”, the words “five per cent. on the amount of income comprised therein” shall be substituted with effect from the 1st day of September, 2019.

Note on Clause 44 of Finance Bill 2019

Clause 44 of the Bill seeks to amend section 194DA of the Income-tax Act relating to payment in respect of life insurance policy.

The said section provides for levy of tax deduction at source at the rate of one per cent. on the sum payable by way of a life insurance policy, including the sum allocated by way of bonus on such life insurance policy, excluding the amount exempted under clause (10D) of section 10.

It is proposed to amend the said section so as to provide that the levy of tax deduction at source shall be on the income comprised in the sum payable by way of redemption of a life insurance policy, including the sum allocated by way of bonus on such life insurance policy, excluding the amount exempted under the said clause (10D) of section 10 at the increased rate of five per cent.

This amendment will take effect from 1st September, 2019.

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