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.
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 |
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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.
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.
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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.