Section 194DA of the Income Tax Act, 1961 is a provision that deals with the taxation of proceeds received from life insurance policies. It mandates that a portion of the sum received from a life insurance policy is to be deducted at source as tax by the insurance company. In this blog, we will discuss the various aspects of section 194DA and its implications.
Applicability of Section 194DA:
Section 194DA applies to all life insurance policies that have been issued on or after September 1, 2019. The provision also applies to policies that have been renewed on or after that date. The section is applicable to all types of life insurance policies, including endowment policies, ULIPs, and term insurance policies.
TDS Rates:
As per section 194DA, the TDS (Tax Deducted at Source) rate applicable on life insurance payouts is 5%. This means that if an individual receives Rs. 10 lakh as maturity proceeds from a life insurance policy, the insurance company will deduct Rs. 50,000 as TDS and remit Rs. 9.50 lakh to the policyholder.
Exemptions:
The provision of section 194DA comes with certain exemptions. If the total amount of proceeds received from a life insurance policy during a financial year does not exceed Rs. 1 lakh, no TDS is deducted on such amounts. Additionally, if the sum received by the legal heir or nominee of the policyholder in the event of the policyholder’s death is below Rs. 5 lakhs, no TDS is deducted on such amounts.
Procedure for TDS Deduction:
The insurance company is responsible for deducting TDS under section 194DA. They are required to deduct the applicable TDS amount from the payout made to the policyholder and remit it to the government within the specified time frame. The insurance company is also required to issue a TDS certificate to the policyholder, which can be used while filing the income tax return.
Implications for Policyholders:
Section 194DA has several implications for policyholders. Firstly, policyholders must be aware that the TDS deduction will reduce the amount of the payout they receive from the insurance company. Secondly, policyholders must ensure that they provide accurate PAN details to the insurance company to avoid any discrepancies in TDS deduction. If the PAN details are not provided or are incorrect, the TDS deduction may be at a higher rate of 20%.
It is also important to note that policyholders must include the payout received from the insurance company in their income tax return. The TDS amount deducted by the insurance company can be claimed as a tax credit against the total tax payable.
Impact on Insurance Companies:
Section 194DA also has an impact on insurance companies. Insurance companies must ensure that they comply with the TDS provisions and deduct TDS as applicable. They must also ensure that they issue TDS certificates to policyholders within the specified time frame.
The introduction of section 194DA has also led to an increase in the compliance burden for insurance companies. They must maintain proper records of TDS deductions and remittances made to the government. They must also ensure that they provide accurate information to policyholders regarding TDS deductions.
Possible Future Developments:
There have been discussions and proposals to make certain amendments to section 194DA in the future. Some of the proposed changes include increasing the threshold limit for TDS deduction to Rs. 2.5 lakhs and allowing policyholders to claim credit for excess TDS deduction in subsequent years.
There have also been suggestions to exempt certain types of policies, such as term insurance policies, from the purview of section 194DA. The rationale behind this proposal is that term insurance policies do not have a maturity payout and are primarily designed to provide life cover.
However, it remains to be seen if these proposals will be accepted and implemented by the government. Until then, policyholders and insurance companies must continue to comply with the provisions of section 194DA as they currently stand.
Importance of Tax Planning:
Given the impact of section 194DA on life insurance payouts, it is important for individuals to incorporate tax planning as part of their overall financial planning. Individuals must consider the tax implications of their investments and financial decisions and make informed choices to minimize their tax liability.
There are several tax-saving instruments available, such as ELSS funds, PPF, NPS, and tax-saving fixed deposits, which can help individuals reduce their tax liability. Additionally, individuals must also ensure that they take advantage of all the available tax deductions and exemptions while filing their income tax return.
Conclusion:
Section 194DA of the Income Tax Act, 1961, is a provision that has been introduced to ensure that life insurance policyholders pay tax on the income generated from their policies. The TDS rate of 5% may seem high, but it is important to note that this rate is only applicable on the income generated from the policy and not on the entire payout. As a policyholder, it is essential to keep track of the TDS deducted by the insurance company and ensure that the TDS certificate is obtained for filing the income tax return.
Read more useful content:
- section 145 of income tax act
- section 10e of income tax act
- section 9 of the income tax act
- section 94b of income tax act
- section 206aa of income tax act
Frequently Asked Questions (FAQs)
What is section 194DA?
Section 194DA is a provision in the Income Tax Act, 1961, that requires life insurance companies to deduct tax at source (TDS) at a rate of 5% on the income portion of payouts made to policyholders.
Who is liable to deduct TDS under section 194DA?
Life insurance companies are liable to deduct TDS under section 194DA.
What is the rate of TDS under section 194DA?
The rate of TDS under section 194DA is 5% of the income portion of the payout.
What is the income portion of the payout?
The income portion of the payout is the difference between the total payout received by the policyholder and the premium paid by the policyholder.
Is TDS applicable on the entire payout received by the policyholder?
No, TDS is applicable only on the income portion of the payout and not on the entire payout.
Is it mandatory to provide PAN details to the life insurance company?
Yes, it is mandatory to provide accurate PAN details to the life insurance company to avoid any discrepancies in TDS deduction. If the PAN details are not provided or are incorrect, the TDS deduction may be at a higher rate of 20%.
What is the penalty for non-compliance with TDS provisions under section 194DA?
Non-compliance with TDS provisions under section 194DA can result in a penalty of up to Rs. 1 lakh.
Can policyholders claim credit for TDS deducted under section 194DA?
Yes, policyholders can claim credit for TDS deducted under section 194DA against the total tax payable.
What is the time frame for issuing TDS certificates to policyholders?
Life insurance companies must issue TDS certificates to policyholders within 15 days from the due date of TDS payment.
Are there any exemptions to section 194DA?
No, there are no exemptions to section 194DA, and it is applicable to all life insurance policies.
