Section 194D of the Income Tax Act is a provision that deals with the TDS (Tax Deducted at Source) on insurance commission. As per this section, any person who is responsible for paying an insurance commission is required to deduct TDS at the rate of 5% before making the payment to the recipient. In this blog, we will discuss the provisions of Section 194D of the Income Tax Act in detail.
Meaning of Section 194D
Section 194D of the Income Tax Act applies to any person responsible for paying an insurance commission to a resident. The section requires the person to deduct TDS at the rate of 5% on the commission paid. The TDS must be deducted at the time of credit of such commission to the account of the payee or at the time of payment of such commission, whichever is earlier.
Applicability of Section 194D
Section 194D is applicable to the following:
- Any person who is responsible for paying an insurance commission to a resident.
- Any person who is responsible for paying an insurance commission to a non-resident.
However, in case of payment of insurance commission to a non-resident, the TDS rate applicable is 10% instead of 5%.
Non-Applicability of Section 194D
Section 194D of the Income Tax Act is not applicable in the following cases:
- If the amount of insurance commission payable during the financial year does not exceed Rs. 15,000.
- If the commission is paid to the government, a local authority, or any corporation established by the government.
- If the commission is paid to a reinsurance commission agent.
- If the commission is paid to an insurance agent who is not a resident.
- If the commission is paid to an insurer or a reinsurer.
- If the commission is paid to a co-operative society.
Filing of TDS Return
The person deducting TDS under Section 194D is required to file a TDS return in Form 26Q within the due date. The TDS return must contain details of the TDS deducted and paid to the government. It must also contain details of the deductee, such as name, PAN, and TDS amount.
Consequences of Non-Compliance
Non-compliance with the provisions of Section 194D of the Income Tax Act can lead to various consequences, such as:
Interest: If the TDS is not deducted or deposited within the due date, interest will be levied at the rate of 1% per month or part of the month.
Penalty: If the TDS is not deducted or deposited within the due date, a penalty can be imposed under Section 271C of the Income Tax Act.
Prosecution: If the TDS is not deducted or deposited within the due date, the person can be prosecuted under Section 276B of the Income Tax Act.
In addition to the consequences mentioned in the previous section, non-compliance with the provisions of Section 194D can also result in disallowance of the commission paid as an expense while calculating the income tax liability. This means that the commission paid will be added back to the income of the payer, and tax will be levied on the entire amount.
It is important to note that the TDS deducted under Section 194D can be claimed as a credit while filing the income tax return. The deductee can claim this credit against their total tax liability. However, it is important to ensure that the TDS credit is reflected in the Form 26AS issued by the Income Tax Department.
It is also important to note that the provisions of Section 194D apply only to insurance commission and not to any other type of commission. For example, if a person is paying a commission to a real estate agent, the provisions of Section 194D will not apply, and the TDS will have to be deducted as per the relevant section of the Income Tax Act.
To ensure compliance with Section 194D of the Income Tax Act, it is important for the payer to verify the PAN of the deductee. This can be done online through the Income Tax Department’s website or through the TIN-NSDL portal. If the PAN is not available or is invalid, the TDS rate applicable will be 20% instead of 5% or 10%.
It is also important for the payer to maintain proper records and documentation related to the payment of insurance commission and TDS deducted. These records must be preserved for a period of at least six years from the end of the relevant financial year. In case of any dispute or inquiry by the Income Tax Department, these records can be produced as evidence.
The provisions of Section 194D are applicable to both individual and corporate taxpayers. In case of a corporate taxpayer, the TDS deducted under this section must be deposited in the name of the company and not in the name of any individual.
In case of any ambiguity or doubt regarding the applicability of Section 194D, it is advisable to seek the opinion of a tax expert or consult the Income Tax Department’s website.
Conclusion
Section 194D of the Income Tax Act is an important provision that deals with the TDS on insurance commission. It is important for the person responsible for paying an insurance commission to comply with the provisions of this section. Failure to do so can lead to various consequences, such as interest, penalty, and prosecution. Therefore, it is advisable to consult a tax expert to ensure compliance with the provisions of Section 194D of the Income Tax Act.
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Frequently Asked Questions (FAQs)
- What is Section 194D of the Income Tax Act?
Section 194D is a provision in the Income Tax Act that requires the deduction of TDS on insurance commission.
2. Who is responsible for deducting TDS under Section 194D?
The person who is responsible for paying insurance commission is required to deduct TDS under Section 194D.
3. What is the rate of TDS under Section 194D?
The rate of TDS under Section 194D is 5% for resident individuals and 10% for non-resident individuals and entities.
4. Is there any threshold limit for TDS deduction under Section 194D?
No, there is no threshold limit for TDS deduction under Section 194D. The TDS must be deducted on the entire amount of insurance commission paid.
5. Is TDS under Section 194D applicable only on life insurance policies?
No, TDS under Section 194D is applicable on all types of insurance policies including life insurance, health insurance, and general insurance.
6. Can the TDS credit be claimed by the deductee?
Yes, the TDS credit can be claimed by the deductee while filing their income tax return.
7. What happens if the TDS is not deducted under Section 194D?
If the TDS is not deducted under Section 194D, the payer may face consequences such as interest, penalty, and disallowance of expense.
8. Can the TDS rate be reduced or waived off under Section 194D?
No, the TDS rate cannot be reduced or waived off under Section 194D.
9. Is it necessary to verify the PAN of the deductee before deducting TDS under Section 194D?
Yes, it is necessary to verify the PAN of the deductee before deducting TDS under Section 194D. If the PAN is not available or is invalid, the TDS rate applicable will be 20% instead of 5% or 10%.
10. What is the period for which the records related to TDS deducted under Section 194D must be maintained?
The records related to TDS deducted under Section 194D must be maintained for a period of at least six years from the end of the relevant financial year.
