Section 194DA, is related to the Tax Deducted at Source (TDS) on life insurance policy payments. Specifically, this section applies when the proceeds from a life insurance policy exceed a certain limit, and the policyholder receives a payout.
What is Section 194DA?
Section 194DA requires the insurer (the life insurance company) to deduct TDS at a rate of 5% on the amount of the insurance proceeds that exceed ₹1 lakh. The deduction is applicable if the sum received is not exempt under Section 10(10D) of the Income Tax Act.
Normally, the proceeds from life insurance policies are tax-free under Section 10(10D), provided the premium paid does not exceed 10% of the sum assured. However, if the sum assured is low and the premium paid is high, or if the policy is a single premium policy, the payout might exceed the exemption limit. In such cases, TDS comes into play.
Key Points to Remember:
- TDS Rate: The tax rate for TDS under Section 194DA is 5%, unless a lower rate is applicable under any tax treaty or the recipient is eligible for a lower rate based on other factors like senior citizenship.
- Exemptions: Life insurance proceeds may be exempt from TDS if the amount is less than Rs 1 lakh or if the sum received is entirely covered under Section 10(10D), which typically applies to policies where premiums are low compared to the sum assured.
- Payer’s Responsibility: The insurance company is responsible for deducting and depositing the TDS to the government.
- Resident Policyholder: The TDS provisions under Section 194DA apply to resident individuals.
Example:
Let’s assume you have a life insurance policy with a sum assured of ₹1,50,000, and you receive a maturity benefit of ₹1,20,000 after 20 years.
Since the payout exceeds ₹1 lakh, TDS will be deducted at a rate of 5%.
- Maturity benefit: ₹1,20,000
- TDS Deduction (5% of ₹1,20,000): ₹6,000
- Amount received: ₹1,14,000
In this case, you will receive ₹1,14,000 after TDS deduction of ₹6,000. The life insurance company will deposit the deducted amount with the tax authorities. They will also provide you with a TDS certificate (Form 16A).
Conclusion:
Section 194DA ensures that taxes are collected at the source on life insurance policy payouts that are taxable. While this section applies in specific cases, policyholders should be aware of the TDS provisions to avoid any surprises. Always check the terms of your policy and the potential tax impact when receiving a life insurance payout.
– Ketaki Dandekar (Team Arthology)
Read more about Section 194DA here – https://taxguru.in/income-tax/194da.html