Section 194DA of Income Tax Act: TDS on Life Insurance Payouts

Life insurance policies provide financial security through maturity or death benefits. However, these payouts may attract tax deductions under the Indian law. Section 194DA of the Income Tax Act, 1961, governs the Tax Deducted at Source (TDS) on certain life insurance payouts. It ensures tax is collected upfront only on the taxable income component of such payments.

Section 194DA mandates TDS on payouts from life insurance policies that are not exempt under Section 10(10D). This includes maturity proceeds, surrender values, or bonuses where the policy does not satisfy the exemption conditions. The deduction is made by the insurance company before paying the balance amount to the policyholder.

• Resident Policyholders: Applies to payments made to resident individuals or HUFs
• Non‑Exempt Policies: Policies not qualifying for exemption under Section 10(10D)
• Payout Threshold: Aggregate payouts exceeding ₹1 Lakh in a financial year
• Income Component: TDS applies only to the income portion (total payout - total premiums paid)

Previously, the standard TDS rate under Section 194DA was 5% on the income component of the payout.

Important Changes Applicable for FY 2025‑26

• Reduced TDS Rate: TDS reduced from 5% to 2%
• Effective Date: Applicable to eligible payments made on or after 1 October, 2024
• PAN Requirement: If PAN is not furnished, TDS is deducted at 20% under Section 206AA

These changes reduce the upfront tax burden on life‑insurance policyholders.

Suppose a policyholder receives ₹10 Lakhs as maturity proceeds.

Total premiums paid over the policy term amount to ₹7 Lakhs.

Income component = ₹10 Lakhs – ₹7 Lakhs = ₹3 Lakhs

• TDS at 5% (before 1 Oct, 2024): ₹15,000
• TDS at 2% (on or after 1 Oct, 2024): ₹6,000

The insurance company deducts this TDS before disbursing the balance amount.

Certain life‑insurance payouts are exempt from TDS:

• Exempt under Section 10(10D): No TDS is deducted if the policy qualifies for exemption
• Low Payouts: Aggregate payouts not exceeding ₹1 Lakh in a financial year
• Death Benefits: Amounts received on the death of the insured are fully exempt from tax and TDS
• Lower / Nil Deduction Certificate: If the policyholder obtains a Section 197 certificate, TDS is deducted as per that certificate

The eligibility of a life insurance payout for tax exemption is linked to specific premium thresholds defined under the Income Tax Act. These thresholds vary based on the policy type and issuance date.

• Policies issued on or after 1 April, 2012:
  The premium payable in any year must not exceed 10% of the sum assured.
• Policies issued between 1 April, 2003 and 31 March, 2012:
  The premium limit is 20% of the sum assured.
• ULIPs issued on or after 1 February, 2021:
  The aggregate premium across all such ULIPs must not exceed ₹2.5 Lakhs in a financial year.
• Non-ULIP life insurance policies issued on or after 1 April 2023:
  The aggregate premium across such policies must not exceed ₹5 Lakhs in a financial year.

If the applicable threshold is exceeded, the maturity proceeds do not qualify for exemption under Section 10(10D). In such cases, taxability arises, and TDS under Section 194DA may be applicable at the time of payout.

Failure by the deductor (insurance company) to comply with Section 194DA can lead to:

• Interest at 1% per month for failure to deduct TDS

• Interest at 1.5% per month for failure to deposit deducted TDS

• Penalty up to the amount of TDS not deducted or deposited

• Prosecution under Section 276B in extreme cases

Policyholders can receive a refund if excess TDS is deducted or if total income is below the taxable limit:

• Verify deducted TDS in Form 26AS / AIS

• Claim refund while filing the Income‑tax Return

• Obtain TDS Certificate (Form 16A) from the insurer

• Form 15G / 15H may be submitted only if total taxable income is below the basic exemption limit and eligibility conditions are met

Correct reporting in the ITR is essential for smooth refund processing.