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.

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TDS

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

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.

Rithesh Bajoriya

Chartered Accountant

MRN No.: 407339

City: Varanasi

As a Chartered Accountant with over 18 years of experience, I have honed my skills in the field and developed a genuine passion for writing. I specialize in crafting insightful content on topics such as GST, income tax, audits, and accounts payable. By focusing on delivering information that is both engaging and informative, my aim is to share valuable insights that resonate with readers.

Frequently Asked Questions

What is Section 194DA of the Income Tax Act?

It mandates TDS @ 5 % on income from life-insurance policies not exempt under 10(10D) when payouts exceed ₹1 lakh.
Is TDS applicable on life-insurance maturity payouts?

Yes, if the policy doesn’t qualify for 10(10D) exemption and the payout exceeds ₹1 lakh.
Are death benefits exempt from TDS?

Yes, death benefits are fully exempt under 10(10D) and attract no TDS.
What is the TDS rate on insurance policy surrender value?

5 % on income component (payout – premiums paid) or 20 % if no PAN provided.
How does Section 194DA differ from Section 194D?

Section 194D applies to commission payments to insurance agents; Section 194DA applies to policyholders receiving maturity or surrender proceeds.

View all FAQs