The purpose of this section is to ensure that the government receives tax revenue from life insurance policy payouts. The tax deducted at source (TDS) is calculated at a rate of 5% of the sum received, and it is applicable to any sum over Rs. 1 lakh. However, this rate may be increased to 20% if the PAN (Permanent Account Number) of the policyholder is not available.
It is important to note that the TDS under Section 194DA applies only to non-exempt policies. Policies that are exempt under Section 10(10D) of the Income Tax Act, such as policies that satisfy certain conditions, are not subject to TDS. In other words, if the life insurance policy is not tax-free, then the TDS under Section 194DA is applicable.
Moreover, the TDS under Section 194DA applies only to the amount received as a payout. It does not apply to the premiums paid. Therefore, if the sum received from the life insurance policy is less than Rs. 1 lakh, then no TDS will be deducted, regardless of whether the policy is exempt or non-exempt.
The responsibility of deducting the TDS under Section 194DA lies with the insurance company or the person responsible for making the payment. The TDS amount deducted by the insurance company is required to be deposited with the government within the specified time limit, failing which the company may be subject to penalties.
Overview of Section 194DA
Section 194DA of the Income Tax Act, 1961, was introduced in 2014 to ensure that the government receives tax revenue from life insurance policy payouts. The provision requires the deduction of TDS on any sum received by an individual or HUF from a life insurance policy, including the bonus amount. The TDS is calculated at a rate of 5% on any sum received over Rs. 1 lakh, and it is applicable to non-exempt policies.
Applicability of Section 194DA
Section 194DA applies to all life insurance policies, including traditional life insurance policies, unit-linked insurance plans (ULIPs), endowment plans, and money-back plans. The provision is applicable to both residents and non-residents of India.
TDS Calculation and Rate
The TDS under Section 194DA is calculated on the gross amount of the payout received from the life insurance policy, including the bonus amount. The TDS rate is 5% of the sum received, and it is applicable only to the sum exceeding Rs. 1 lakh. For instance, if the sum received from the policy is Rs. 1.5 lakh, the TDS will be calculated on Rs. 50,000 (i.e., Rs. 1.5 lakh – Rs. 1 lakh). However, if the sum received is less than Rs. 1 lakh, no TDS will be deducted.
In cases where the PAN of the policyholder is not available, the TDS rate may increase to 20%. It is, therefore, essential for policyholders to ensure that their PAN is updated with the insurance company.
Exemptions under Section 10(10D)
Section 194DA is not applicable to policies that are exempt under Section 10(10D) of the Income Tax Act. Policies that satisfy certain conditions, such as policies with a minimum term of 2 years or a minimum premium payment period of 5 years, are exempt under this section. The exemption also applies to policies that have been purchased before 1st April 2012 and whose premiums do not exceed 20% of the sum assured.
Responsibility of Deducting TDS
The responsibility of deducting the TDS under Section 194DA lies with the insurance company or the person responsible for making the payment. The TDS amount deducted by the insurance company is required to be deposited with the government within the specified time limit, failing which the company may be subject to penalties.
Policyholder’s Obligation
The policyholder must provide accurate and updated information to the insurance company, including their PAN details. Failure to provide the PAN details may lead to higher TDS deductions. Policyholders must also ensure that they have accurate information about the TDS deducted by the insurance company, as they can claim a credit for the same in their income tax return.
In conclusion,
Section 194DA of the Income Tax Act, 1961, is an important provision that ensures that the government receives tax revenue from life insurance policy payouts. The TDS is calculated at a rate of 5% on any sum received over Rs. 1 lakh, and it is applicable to non-exempt policies. It is important for policyholders to be aware of this provision so that they can plan their finances accordingly.
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Frequently asked questions about Section 194DA of the Income Tax Act:
Q. What is Section 194DA of the Income Tax Act?
Section 194DA of the Income Tax Act is a provision that requires the deduction of TDS on any sum received by an individual or HUF from a life insurance policy, including the bonus amount. The TDS is calculated at a rate of 5% on any sum received over Rs. 1 lakh, and it is applicable to non-exempt policies.
Q. Which policies are exempt under Section 10(10D) of the Income Tax Act?
Policies that satisfy certain conditions, such as policies with a minimum term of 2 years or a minimum premium payment period of 5 years, are exempt under Section 10(10D) of the Income Tax Act. The exemption also applies to policies that have been purchased before 1st April 2012 and whose premiums do not exceed 20% of the sum assured.
Q. Who is responsible for deducting the TDS under Section 194DA?
The responsibility of deducting the TDS under Section 194DA lies with the insurance company or the person responsible for making the payment.
Q. What is the TDS rate under Section 194DA?
The TDS rate under Section 194DA is 5% of the sum received, and it is applicable only to the sum exceeding Rs. 1 lakh. However, if the sum received is less than Rs. 1 lakh, no TDS will be deducted.
Q. Can the TDS rate increase under Section 194DA?
Yes, the TDS rate may increase to 20% if the PAN of the policyholder is not available.
Q. What is the policyholder’s obligation under Section 194DA?
The policyholder must provide accurate and updated information to the insurance company, including their PAN details. Failure to provide the PAN details may lead to higher TDS deductions. Policyholders must also ensure that they have accurate information about the TDS deducted by the insurance company, as they can claim a credit for the same in their income tax return.
Q. Is Section 194DA applicable to both residents and non-residents of India?
Yes, Section 194DA is applicable to both residents and non-residents of India.
