Section 194D deals with the tax deduction at source (TDS) on insurance commission. This section applies to individuals or entities that pay commission to insurance agents. It mandates that the payer deduct tax before making the payment to the agent. In this blog, we will discuss what Section 194D entails, its applicability, and provide an example for better understanding.
What is Section 194D?
Section 194D requires a person, who is responsible for paying an insurance commission, to deduct tax at the source. This tax is deducted at a specified percentage before the commission is paid to the recipient. The section primarily targets insurance agents who earn commissions from insurance companies for selling policies.
The key points to note about Section 194D are:
- Rate of TDS: The TDS rate under Section 194D is 5%. However, if the recipient fails to provide their Permanent Account Number (PAN), the TDS rate may be higher, typically at 20%.
- Threshold Limit: There is no specific minimum threshold for this section. Even small payments of commission to an insurance agent are subject to TDS.
- Applicability: The section applies to both residents and non-resident insurance agents.
Who Does It Apply To?
This section applies to any person who makes a payment of commission to an insurance agent. This includes both life insurance and general insurance companies, as well as individuals or entities that make such payments.
The insurance agents receiving commissions can be either individuals or organizations, including brokers or firms who help sell insurance products.
The payer is responsible for deducting TDS at the applicable rate before making the payment to an insurance agent. The deducted tax is then deposited with the government.
Example:
Let’s consider an example to make this clear:
Suppose an insurance company pays a commission of ₹10,000 to an insurance agent. The insurance company will deduct 5% TDS on this amount, which comes to ₹500.
- Commission Payment: ₹10,000
- TDS (5%): ₹500
- Amount paid to the agent: ₹9,500
The insurance company will then remit ₹500 as TDS to the government and pay the remaining ₹9,500 to the agent.
Conclusion:
Section 194D ensures that tax is deducted at source on commission payments related to insurance sales, thus helping the government collect tax efficiently. Insurance agents and companies need to ensure compliance with this provision to avoid penalties and interest. By understanding how TDS works, both parties can thus ensure smooth financial operations.
– Ketaki Dandekar (Team Arthology)
Read more about Section 194D here – https://cleartax.in/s/194d-tds