Section 194D and Section 194DA under Income Tax Act

Section 194D and Section 194DA under Income Tax Act. Section 194D and Section 194DA under Income Tax Act are important provisions that relate to the deduction of tax at source (TDS) on insurance-related income. These sections help the government ensure that taxes are collected at the source itself before the income reaches the taxpayer. Both sections serve different purposes but aim at maintaining transparency and accountability in insurance transactions.
Section 194D: TDS on Insurance Commission
Section 194D of the Income Tax Act deals with the tax deduction at source on insurance commission paid to agents. This section applies to any person who pays an income to a resident individual in the form of remuneration or reward for generating insurance business. This includes commission or any form of payment related to the solicitation or renewal of insurance policies. The aim of this section is to ensure that the income received by insurance agents is properly taxed and recorded.
Who is required to deduct TDS under Section 194D?
Any person, whether an individual or a company, who is responsible for paying an insurance commission to a resident is required to deduct TDS under Section 194D. This means that insurance companies like LIC, HDFC Life, ICICI Prudential, and others, who regularly pay commissions to their agents, are required to deduct TDS before making payments. It is important to note that this section only applies to residents; for non-residents, TDS is deducted under Section 195.
Rate and Time of TDS Deduction under Section 194D
The rate of tax deduction under Section 194D is 5% for resident individuals and Hindu Undivided Families (HUFs). For domestic companies, the rate is 10%. If the deductee fails to provide a valid PAN, then the TDS is deducted at a higher rate of 20%. TDS must be deducted at the time of crediting the income to the payee’s account or at the time of actual payment, whichever is earlier. This ensures timely deduction and deposit of tax.
Exception under Section 194D
There are certain exceptions under Section 194D. If the amount of insurance commission paid does not exceed Rs. 15,000 in a financial year, then no TDS is required to be deducted. Additionally, if the payee submits Form 15G or Form 15H, declaring that their income is below the taxable limit, then TDS is not required. These exceptions provide relief to small agents and ensure that only significant transactions are brought under the TDS net.
Penalty for Late Deduction of TDS under Section 194D
In case the person responsible for deducting TDS fails to do so on time, they are liable to pay interest. The interest is charged at the rate of 1% per month or part of the month from the date when the tax was deductible to the actual date of deduction. This penalty ensures that payers comply with the TDS provisions without delay.
Budget 2024 Update for Section 194D
To simplify the process and reduce the compliance burden, the government has proposed a reduction in the TDS rate under Section 194D. From April 1, 2025, the TDS rate on insurance commission is proposed to be reduced from 5% to 2%. This change is aimed at promoting ease of doing business and increasing tax compliance among insurance agents.
Section 194DA: TDS on Payment of Life Insurance Policy
Section 194DA under Income Tax Act pertains to the deduction of TDS on payments made to a resident under a life insurance policy. This includes any sum received on the maturity of a life insurance policy, including any bonus amount. However, this section only applies if the amount received is not exempt under Section 10(10D) of the Income Tax Act.
Who is required to deduct TDS under Section 194DA?
Any person who makes a payment to a resident under a life insurance policy is required to deduct TDS under Section 194DA. This could include insurance companies or any other institutions that issue life insurance policies. The provision is applicable whether the policy includes a bonus or not. The payer must deduct tax before releasing the maturity amount to the policyholder.
Rate and Time of TDS Deduction under Section 194DA
The current rate of TDS under Section 194DA is 5%. This tax is deducted only on the taxable portion of the amount, which is the total maturity proceeds minus the total premiums paid. If the PAN is not provided by the payee, then the TDS is deducted at a higher rate of 20%. TDS is deducted at the time of making the payment. This ensures that taxes are collected before the funds are released to the policyholder.
Exceptions under Section 194DA
No TDS is required under Section 194DA in the following cases:
1. When the total amount paid or the aggregate amount during a financial year is less than Rs. 1,00,000.
2. When the maturity proceeds are exempt under Section 10(10D) of the Income Tax Act. This exemption applies in the following situations:
The policy was issued between April 1, 2003, and March 31, 2012, and the annual premium does not exceed 20% of the sum assured.
The policy was issued on or after April 1, 2012, and the annual premium does not exceed 10% of the sum assured.
For policies issued on or after April 1, 2013, for persons with disabilities under Sections 80U or 80DDB, and the premium does not exceed 15% of the sum assured.
3. When the policyholder submits Form 15G or Form 15H, declaring that their income is below the taxable limit.
Budget 2024 Update for Section 194DA
As per the Budget 2024 announcement, the TDS rate under Section 194DA was proposed to be reduced from 5% to 2%. This new rate was effected from October 1, 2024. The government has introduced this change to improve compliance and simplify the tax process for insurance policyholders.
Difference Between Section 194D and Section 194DA
Understanding the difference between Section 194D and Section 194DA under Income Tax Act is essential for taxpayers involved in insurance-related income. While both deal with insurance, their applicability, threshold limits, and rates differ.
Applicability:

Section 194D applies to insurance commission paid to a resident for procuring or renewing insurance business.

Section 194DA applies to payments made under a life insurance policy, excluding those exempt under Section 10(10D).

Who Should Deduct:

Under Section 194D, the person or company paying the insurance commission is responsible for deducting TDS.

Under Section 194DA, the insurer paying the maturity proceeds to a policyholder must deduct TDS.

Time of Deduction:

In Section 194D, TDS is deducted at the time of credit or payment, whichever is earlier.

In Section 194DA, TDS is deducted at the time of actual payment.

Threshold Limit:

Under Section 194D, no TDS is required if the commission is up to Rs. 15,000 in a financial year.

Under Section 194DA, no TDS is deducted if the payout is up to Rs. 1,00,000 in a financial year.

Rate of TDS:

Section 194D has a rate of 5% for individuals/HUFs and 10% for companies (to be reduced to 2% from April 1, 2025).

Section 194DA has a rate of 5% on the taxable portion (to be reduced to 2% from October 1, 2024).

Exemptions:

In Section 194D, no TDS if income is below Rs. 15,000 or Form 15G/H is submitted.

In Section 194DA, no TDS if payout is below Rs. 1,00,000, policy qualifies under Section 10(10D), or Form 15G/H is submitted.

Conclusion
Section 194D and Section 194DA of the Income Tax Act play an important role in ensuring tax compliance in the insurance sector. While Section 194D covers the TDS on insurance commissions paid to agents, Section 194DA covers TDS on maturity proceeds of life insurance policies. Knowing these provisions helps both payers and recipients comply with tax laws and avoid penalties. With recent changes introduced in Budget 2024, the reduction in TDS rates is a welcome move aimed at improving ease of doing business and enhancing transparency.
In case of any doubts or need any support, you can book a consultation with Compliance Calendar LLP Experts through email at info@ccoffice.in or Call/Whatsapp at +91 9988424211.
FAQs
Q1. What is the main difference between Section 194D and Section 194DA under the Income Tax Act?
Ans. Section 194D deals with TDS on insurance commissions paid to agents for procuring or renewing insurance policies. It applies to income earned as commission by residents.
 On the other hand, Section 194DA deals with TDS on the maturity amount or bonuses paid under a life insurance policy, provided such payments are not exempt under Section 10(10D). It applies to the payout received by the policyholder.
Q2. When is TDS required to be deducted under Section 194D?
Ans. TDS under Section 194D is required to be deducted when the payment is made or credited to a resident agent for services related to procuring or renewing insurance policies. The deduction should be done at the earlier of the two events: credit to the agent's account or actual payment, whichever comes first.
Q3. What is the threshold limit under Section 194D and Section 194DA?
Ans. Under Section 194D, no TDS is deducted if the total commission paid during a financial year does not exceed Rs.15,000.
 Under Section 194DA, no TDS is deducted if the total maturity amount (or aggregate of such amounts in a financial year) paid to a resident policyholder is less than Rs.1,00,000.
Q4. At what rate is TDS deducted under Section 194DA?
Ans. TDS under Section 194DA is deducted at 5% on the taxable portion of the payout (i.e., maturity proceeds minus the total premium paid).
 However, if the recipient does not provide their PAN, a higher rate of 20% is applied. From October 1, 2024, the TDS rate will be reduced from 5% to 2% as per Budget 2024 announcements.
Q5. Is it necessary to deduct TDS under Section 194DA if the life insurance policy is exempt under Section 10(10D)?
Ans. No, if the life insurance policy qualifies for exemption under Section 10(10D), TDS under Section 194DA is not required. For example, if the annual premium does not exceed the specified percentage of the sum assured (10%, 15%, or 20% depending on the policy and the policyholder), the payout is tax-free and exempt from TDS.
Q6. What happens if TDS is not deducted on time under Section 194D or Section 194DA?
Ans. If TDS is not deducted on time, the person responsible for the deduction is liable to pay interest at 1% per month or part of a month from the date it was deductible to the date it is actually deducted. Late deduction or failure to deduct may also lead to penalties under the Income Tax Act.
Q7. Can a person avoid TDS under Section 194D or Section 194DA by submitting a declaration?
Ans. Yes, if the recipient's total income is below the taxable limit, they can submit Form 15G or Form 15H (for senior citizens) to the payer. Upon submission, the payer is not required to deduct TDS under Section 194D or Section 194DA. However, the form must be correctly filled and submitted in advance to be considered valid.

Section 194D and Section 194DA under Income Tax Act are important provisions that relate to the deduction of tax at source (TDS) on insurance-related income. These sections help the government ensure that taxes are collected at the source itself before the income reaches the taxpayer. Both sections serve different purposes but aim at maintaining transparency and accountability in insurance transactions.

Section 194D: TDS on Insurance Commission

Section 194D of the Income Tax Act deals with the tax deduction at source on insurance commission paid to agents. This section applies to any person who pays an income to a resident individual in the form of remuneration or reward for generating insurance business. This includes commission or any form of payment related to the solicitation or renewal of insurance policies. The aim of this section is to ensure that the income received by insurance agents is properly taxed and recorded.

Who is required to deduct TDS under Section 194D?

Any person, whether an individual or a company, who is responsible for paying an insurance commission to a resident is required to deduct TDS under Section 194D. This means that insurance companies like LIC, HDFC Life, ICICI Prudential, and others, who regularly pay commissions to their agents, are required to deduct TDS before making payments. It is important to note that this section only applies to residents; for non-residents, TDS is deducted under Section 195.

Rate and Time of TDS Deduction under Section 194D

The rate of tax deduction under Section 194D is 5% for resident individuals and Hindu Undivided Families (HUFs). For domestic companies, the rate is 10%. If the deductee fails to provide a valid PAN, then the TDS is deducted at a higher rate of 20%. TDS must be deducted at the time of crediting the income to the payee’s account or at the time of actual payment, whichever is earlier. This ensures timely deduction and deposit of tax.

Exception under Section 194D

There are certain exceptions under Section 194D. If the amount of insurance commission paid does not exceed Rs. 15,000 in a financial year, then no TDS is required to be deducted. Additionally, if the payee submits Form 15G or Form 15H, declaring that their income is below the taxable limit, then TDS is not required. These exceptions provide relief to small agents and ensure that only significant transactions are brought under the TDS net.

Penalty for Late Deduction of TDS under Section 194D

In case the person responsible for deducting TDS fails to do so on time, they are liable to pay interest. The interest is charged at the rate of 1% per month or part of the month from the date when the tax was deductible to the actual date of deduction. This penalty ensures that payers comply with the TDS provisions without delay.

Budget 2024 Update for Section 194D

To simplify the process and reduce the compliance burden, the government has proposed a reduction in the TDS rate under Section 194D. From April 1, 2025, the TDS rate on insurance commission is proposed to be reduced from 5% to 2%. This change is aimed at promoting ease of doing business and increasing tax compliance among insurance agents.

Section 194DA: TDS on Payment of Life Insurance Policy

Section 194DA under Income Tax Act pertains to the deduction of TDS on payments made to a resident under a life insurance policy. This includes any sum received on the maturity of a life insurance policy, including any bonus amount. However, this section only applies if the amount received is not exempt under Section 10(10D) of the Income Tax Act.

Who is required to deduct TDS under Section 194DA?

Any person who makes a payment to a resident under a life insurance policy is required to deduct TDS under Section 194DA. This could include insurance companies or any other institutions that issue life insurance policies. The provision is applicable whether the policy includes a bonus or not. The payer must deduct tax before releasing the maturity amount to the policyholder.

Rate and Time of TDS Deduction under Section 194DA

The current rate of TDS under Section 194DA is 5%. This tax is deducted only on the taxable portion of the amount, which is the total maturity proceeds minus the total premiums paid. If the PAN is not provided by the payee, then the TDS is deducted at a higher rate of 20%. TDS is deducted at the time of making the payment. This ensures that taxes are collected before the funds are released to the policyholder.

Exceptions under Section 194DA

No TDS is required under Section 194DA in the following cases:

1. When the total amount paid or the aggregate amount during a financial year is less than Rs. 1,00,000.

2. When the maturity proceeds are exempt under Section 10(10D) of the Income Tax Act. This exemption applies in the following situations:

The policy was issued between April 1, 2003, and March 31, 2012, and the annual premium does not exceed 20% of the sum assured.

The policy was issued on or after April 1, 2012, and the annual premium does not exceed 10% of the sum assured.

For policies issued on or after April 1, 2013, for persons with disabilities under Sections 80U or 80DDB, and the premium does not exceed 15% of the sum assured.

3. When the policyholder submits Form 15G or Form 15H, declaring that their income is below the taxable limit.

Budget 2024 Update for Section 194DA

As per the Budget 2024 announcement, the TDS rate under Section 194DA was proposed to be reduced from 5% to 2%. This new rate was effected from October 1, 2024. The government has introduced this change to improve compliance and simplify the tax process for insurance policyholders.

Difference Between Section 194D and Section 194DA

Understanding the difference between Section 194D and Section 194DA under Income Tax Act is essential for taxpayers involved in insurance-related income. While both deal with insurance, their applicability, threshold limits, and rates differ.

Applicability:

Section 194D applies to insurance commission paid to a resident for procuring or renewing insurance business.
Section 194DA applies to payments made under a life insurance policy, excluding those exempt under Section 10(10D).

Who Should Deduct:

Under Section 194D, the person or company paying the insurance commission is responsible for deducting TDS.
Under Section 194DA, the insurer paying the maturity proceeds to a policyholder must deduct TDS.

Time of Deduction:

In Section 194D, TDS is deducted at the time of credit or payment, whichever is earlier.
In Section 194DA, TDS is deducted at the time of actual payment.

Threshold Limit:

Under Section 194D, no TDS is required if the commission is up to Rs. 15,000 in a financial year.
Under Section 194DA, no TDS is deducted if the payout is up to Rs. 1,00,000 in a financial year.

Rate of TDS:

Section 194D has a rate of 5% for individuals/HUFs and 10% for companies (to be reduced to 2% from April 1, 2025).
Section 194DA has a rate of 5% on the taxable portion (to be reduced to 2% from October 1, 2024).

Exemptions:

In Section 194D, no TDS if income is below Rs. 15,000 or Form 15G/H is submitted.
In Section 194DA, no TDS if payout is below Rs. 1,00,000, policy qualifies under Section 10(10D), or Form 15G/H is submitted.

Conclusion

Section 194D and Section 194DA of the Income Tax Act play an important role in ensuring tax compliance in the insurance sector. While Section 194D covers the TDS on insurance commissions paid to agents, Section 194DA covers TDS on maturity proceeds of life insurance policies. Knowing these provisions helps both payers and recipients comply with tax laws and avoid penalties. With recent changes introduced in Budget 2024, the reduction in TDS rates is a welcome move aimed at improving ease of doing business and enhancing transparency.

In case of any doubts or need any support, you can book a consultation with Compliance Calendar LLP Experts through email at info@ccoffice.in or Call/Whatsapp at +91 9988424211.

FAQs

Q1. What is the main difference between Section 194D and Section 194DA under the Income Tax Act?

Ans. Section 194D deals with TDS on insurance commissions paid to agents for procuring or renewing insurance policies. It applies to income earned as commission by residents.

On the other hand, Section 194DA deals with TDS on the maturity amount or bonuses paid under a life insurance policy, provided such payments are not exempt under Section 10(10D). It applies to the payout received by the policyholder.

Q2. When is TDS required to be deducted under Section 194D?

Ans. TDS under Section 194D is required to be deducted when the payment is made or credited to a resident agent for services related to procuring or renewing insurance policies. The deduction should be done at the earlier of the two events: credit to the agent's account or actual payment, whichever comes first.

Q3. What is the threshold limit under Section 194D and Section 194DA?

Ans. Under Section 194D, no TDS is deducted if the total commission paid during a financial year does not exceed Rs.15,000.

Under Section 194DA, no TDS is deducted if the total maturity amount (or aggregate of such amounts in a financial year) paid to a resident policyholder is less than Rs.1,00,000.

Q4. At what rate is TDS deducted under Section 194DA?

Ans. TDS under Section 194DA is deducted at 5% on the taxable portion of the payout (i.e., maturity proceeds minus the total premium paid).

However, if the recipient does not provide their PAN, a higher rate of 20% is applied. From October 1, 2024, the TDS rate will be reduced from 5% to 2% as per Budget 2024 announcements.

Q5. Is it necessary to deduct TDS under Section 194DA if the life insurance policy is exempt under Section 10(10D)?

Ans. No, if the life insurance policy qualifies for exemption under Section 10(10D), TDS under Section 194DA is not required. For example, if the annual premium does not exceed the specified percentage of the sum assured (10%, 15%, or 20% depending on the policy and the policyholder), the payout is tax-free and exempt from TDS.

Q6. What happens if TDS is not deducted on time under Section 194D or Section 194DA?

Ans. If TDS is not deducted on time, the person responsible for the deduction is liable to pay interest at 1% per month or part of a month from the date it was deductible to the date it is actually deducted. Late deduction or failure to deduct may also lead to penalties under the Income Tax Act.

Q7. Can a person avoid TDS under Section 194D or Section 194DA by submitting a declaration?

Ans. Yes, if the recipient's total income is below the taxable limit, they can submit Form 15G or Form 15H (for senior citizens) to the payer. Upon submission, the payer is not required to deduct TDS under Section 194D or Section 194DA. However, the form must be correctly filled and submitted in advance to be considered valid.