TDS on Insurance Commission: A Look at Section 194D of the Income Tax Act
Insurance plays a crucial role in safeguarding us against financial hardships caused by medical emergencies. Many people choose to secure insurance policies through agents and brokers who earn commissions for their services. However, these commissions are subject to Tax Deducted at Source (TDS) under Section 194D of the Income Tax Act.
What is TDS under Section 194D?
Section 194D mandates the deduction of tax at source on payments made as commission or other remuneration to insurance agents and brokers. This tax is deducted at the time of crediting the agent's account or when the payment is made by check, cash, draft, or any other mode. However, this deduction only applies if the total amount paid or payable to the agent during the financial year exceeds Rs. 15,000.
Who is Required to Deduct TDS under Section 194D?
- Remuneration, reward, or commission
- Soliciting or procuring new insurance business
- Activities related to continuing, renewing, or reviving existing insurance policies
This provision applies to resident individuals, Hindu Undivided Families (HUFs), companies, and any other taxpayers in India. For non-resident agents and brokers, TDS is deducted under Section 195 of the Income Tax Act.
When is TDS Deducted under Section 194D?
- When the commission is credited to the agent's account.
- When the payment is made to the agent by check, demand draft, or any other form.
TDS Rate Deduction under Section 194D
- 5%: For individuals who are not companies.
- 10%: For domestic companies.
- 20%: If the agent fails to provide their Permanent Account Number (PAN).
Form 13 and 15G
Agents can submit Form 13 to the assessment office, authorizing the payer to deduct TDS at a lower rate or not deduct it at all. However, to obtain a certificate under Section 197 for non-deduction or a reduced rate of deduction, the agent must provide their PAN as per Section 206AA(4). If the declaration is invalid, the payer must deduct TDS at a rate of 20%.
In the case of Form 15G, the agent must submit a copy to the Principal Commissioner or Commissioner within seven days of the payer receiving it. This form declares that the agent's income falls below the taxable limit.
Penalty for Late TDS Deduction
If the payer forgets to deduct TDS when making a payment, they are liable to pay interest at a rate of 1% per month or part of a month from the date the TDS was due until the actual deduction date.
Exemptions under Section 10(10D)
Section 10(10D) of the Income Tax Act offers exemptions from TDS on certain insurance policy payouts. These exemptions include:
- Amounts received under an LIC policy, including bonuses.
- Funds received under Sections 80DD(3) or 80DDA(3) related to disability benefits.
- Cash received under a keyman insurance policy purchased between April 1, 2003, and March 31, 2012, where the premium exceeds 20% of the sum assured.
- LIC policies purchased after April 1, 2012, where the premium payment is greater than 10% of the sum insured.
- LIC policies purchased after April 1, 2013, with premiums exceeding 15% of the sum insured for people with disabilities as defined under Section 80U or for those covered by Section 80DDB.
There is no upper limit on the exemption amount under Section 10(10D) as long as the specified conditions are met.
Conclusion
Understanding Section 194D of the Income Tax Act is essential for both insurance agents and brokers, as well as those responsible for making commission payments. By following the guidelines outlined in this section, TDS deductions on insurance commissions can be made accurately.