Section 194D

Introduction

Insurance plays a crucial role in financial planning, providing a safety net during unexpected situations such as medical emergencies. With individuals often purchasing insurance policies through agents or brokers, it’s important to understand how the insurance commission paid to these intermediaries is taxed under the Income Tax Act. Specifically, Section 194D governs the TDS (Tax Deducted at Source) on insurance commission.

In this article, we will explore Section 194D in detail, its implications on insurance commissions, eligibility, TDS rates, exemptions, and penalties. Let’s dive into the essentials of this section to better understand its role in insurance taxation.

What is Section 194D?

Section 194D of the Income Tax Act governs the tax deducted at source (TDS) on any commission, remuneration, or reward paid to insurance agents or brokers for soliciting or procuring insurance business. TDS is also applicable to payments related to the continuance, renewal, or revival of insurance policies.

Key Points of Section 194D:

Commission or Remuneration: Any reward, whether as a commission or in other forms, paid for procuring insurance business is subject to TDS under Section 194D.
Time of Deduction: The deduction should be made at the time of crediting the amount to the payee’s account or at the time of actual payment (cheque, draft, or cash), whichever is earlier.
Threshold Limit: TDS is applicable only if the total amount paid during a financial year exceeds Rs. 15,000.
Applicability: This section applies to residents of India, whether individuals, HUFs, companies, or other taxpayers.

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Eligibility for Section 194D TDS Deduction

TDS under Section 194D applies to the person responsible for paying any insurance commission, reward, or remuneration to residents, including:

Insurance agents
Brokers
Other individuals involved in procuring, renewing, or maintaining insurance policies

Applicability to Indian Residents

This section applies only to residents, while commissions paid to non-residents are covered under Section 195. Whether you are an individual, HUF, company, or any other entity, you are liable to deduct TDS under Section 194D.

Time Limits for Deduction of TDS under Section 194D

The person responsible for deducting TDS must do so either:

At the time of crediting: When the income is credited to the payee’s account.
At the time of payment: During actual payment, whether by cheque, draft, or cash.

The deduction should be made at whichever time occurs first.

Rate of TDS Deduction Under Section 194D

TDS rates under Section 194D vary based on the type of payee:

5% for individuals or entities that are not companies.
10% for domestic companies.
20% if the payee fails to furnish a PAN (Permanent Account Number).

Penalties for Failure to Furnish PAN

If the payee does not provide their PAN, the TDS rate applicable will be 20%, as mandated by Section 206AA.

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Special Provisions: Form 13 and 15G

There are instances where an agent or broker may apply for non-deduction or deduction at a lower rate by submitting specific forms:

Form 13: The agent can submit this application to the tax assessment office, and based on approval, the payer may not deduct TDS or deduct it at a lower rate.
Form 15G: If the agent submits Form 15G, it needs to be submitted by the deductor to the Principal Commissioner by the 7th of the following month.

Penalty for Late Deduction of TDS

If the deductor fails to deduct TDS on time, an interest penalty is levied:

1% per month or part of the month for delays in deduction.

This interest is calculated from the date TDS was required to be deducted until the actual date of deduction.

Exemptions Under Section 10(10D)

There are several exemptions provided under Section 10(10D) of the Income Tax Act for amounts received from life insurance policies. These exemptions include:

Amounts received under policies where the premium does not exceed 10% of the sum assured.
Policies for individuals with disabilities (Section 80U) or critical illnesses (Section 80DDB) are exempt if the premium does not exceed 15% of the sum assured.
LIC policies obtained between April 1, 2003, and March 31, 2012, are exempt provided the premium does not exceed 20% of the sum assured.

Exemptions Not Covered:

Policies purchased under the Keyman insurance policy.
Policies where premiums exceed the prescribed limits.

Conclusion

Understanding Section 194D is crucial for agents and brokers who receive insurance commissions, as well as for those responsible for making these payments. This section ensures that the correct tax is deducted at the source, simplifying tax compliance for both payers and payees. By staying compliant with Section 194D, taxpayers can avoid penalties and ensure that their tax obligations are fulfilled efficiently.