Section 194DA: Complete Guide to TDS on Insurance Policy Maturity Payouts
Life insurance policies provide both protection and investment returns. However, in some cases, the maturity or surrender proceeds of a policy attract Tax Deducted at Source (TDS) under Section 194DA of the Income Tax Act .
This section ensures that taxpayers who receive non-exempt insurance proceeds pay the correct tax on their earnings. Here’s a complete guide to its applicability, exemptions, rates, and compliance rules.
Book A Demo
Understanding Section 194DA of the Income Tax Act
Section 194DA applies when an insurer pays any sum under a life-insurance policy to a resident individual and the proceeds are not exempt under Section 10(10D).
- TDS is deducted only on the income component (i.e., payout – premiums paid).
- The rule covers maturity, surrender, and survival benefits.
Death benefits are completely exempt.
Applicability of Section 194DA on Life-Insurance Payouts
TDS liability depends on the nature of payout.
Maturity Proceeds
If the policy doesn’t meet Section 10(10D) conditions (e.g., premium > 10 % of sum assured), the maturity proceeds are taxable. TDS @ 5 % is deducted on the income portion.
Surrender Value
If a policyholder surrenders a policy before maturity, the surrender value may also attract TDS if not exempt and above ₹1 lakh.
Death Benefits
All death-related payouts to nominees are fully exempt from tax. No TDS is deducted.
TDS Rates and Thresholds under Section 194DA
| Particulars | Details |
|---|---|
| Applicable when | Payment exceeds ₹1,00,000 in a financial year and is not exempt under 10(10D) |
| TDS Rate | 5% on income portion (payout – premiums paid) |
| If PAN not furnished | 20% |
| Applicable to | Resident individuals (not companies or non-residents) |
| Effective Date | 1 September 2019 (amendment clarified deduction on income component only) |
Example: If total maturity amount = ₹5 lakh and premiums paid = ₹4 lakh → taxable income = ₹1 lakh → TDS @ 5 % = ₹5,000.
Exemptions Available under Section 10(10D)
| Policy Issued On/After | Condition for Exemption | Premium Cap (percentage of Sum Assured) |
|---|---|---|
| 1 Apr 2003 – 31 Mar 2012 | Premium ≤ 20% of Sum Assured | 20% |
| On/After 1 Apr 2012 | Premium ≤ 10% of Sum Assured | 10% |
| On/After 1 Apr 2013 (for disabled / specified disease individuals) | Premium ≤ 15% of Sum Assured | 15% |
If the policy fails these limits, the maturity or surrender amount becomes taxable and Section 194DA applies.
Difference Between Section 194D and Section 194DA
| Basis | Section 194D | Section 194DA |
|---|---|---|
| Nature of Payment | Commission to insurance agents | Maturity or surrender payouts to policyholders |
| Who Deducts TDS | Insurance company on agent’s commission | Insurer on payouts to policyholder |
| Threshold Limit | ₹15,000 per FY | ₹1,00,000 per FY |
| TDS Rate | 5% (10% if no PAN) | 5% on income portion (20% if no PAN) |
| Recipient | Agent / intermediary | Policyholder |
| Applicable Law Section | Chapter XVII – 194D | Chapter XVII – 194DA |
Procedure for Deducting and Depositing TDS
| Step | Activity | Description |
|---|---|---|
| 1 | Collect PAN | Obtain and verify policyholder’s PAN before payout. If not provided → deduct @ 20%. |
| 2 | Calculate Income Portion | Payout – total premiums paid = taxable income for TDS @ 5%. |
| 3 | Deposit TDS | Deposit by 7th of next month (30 April for March payouts). |
| 4 | File TDS Return | Quarterly filing in Form 26Q via TRACES portal. |
| 5 | Issue TDS Certificate | Form 16A within 15 days after return due date. |
Proper documentation is critical to substantiate compliance during audits.
Penalties for Non-Compliance
| Nature of Default | Interest / Penalty Leviable | Description |
|---|---|---|
| Late Deduction of TDS | Interest @ 1% per month | From date tax was deductible till actual deduction |
| Late Deposit of TDS | Interest @ 1.5% per month | From deduction date till deposit date |
| Late Filing of Return (234E) | ₹200 per day | Capped to amount of TDS |
| Incorrect / Non-Filing (271H) | ₹10,000 – ₹1 lakh | For false or delayed return submission |
Explore All BUSY Calculators for Easy GST Compliance
Conclusion
Section 194DA plays an important role in ensuring fair taxation on life-insurance proceeds that don’t meet exemption conditions under Section 10(10D).
- No TDS → on death benefits and qualifying policies.
- TDS @ 5 % → on non-exempt maturity or surrender values above ₹1 lakh.
- Maintain records → for premiums, policy details, and Form 16A.
For insurers and taxpayers alike, understanding these provisions helps avoid unnecessary deductions, interest, or penalties while ensuring transparent tax reporting.
