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 Indian law. Section 194DA of the Income Tax Act, 1961, governs the Tax Deducted at Source (TDS) on life insurance payouts. It ensures tax is collected upfront on the 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 exceeding specified thresholds. The deduction is made before paying the balance amount to the policyholder. 

Key Applicability Criteria

• Resident Policyholders: Applies to payments made to resident individuals

• 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 (payout minus total premiums paid)

Previously, the standard TDS rate under Section 194DA was 5% on the income component of the payout. The income component is calculated by subtracting the total premiums paid from the total amount received by the policyholder. 

Important Changes in Union Budget 2024-25

• Reduced TDS Rate: The TDS rate has been reduced from 5% to 2%

• Effective Date: This applies to all eligible payments made on or after 1st October 2024

• PAN Requirement: If the policyholder fails to provide their PAN, the TDS rate increases to 20%

 

These changes aim to provide relief to policyholders by reducing the tax burden on life insurance payouts. 

Example Calculation

• 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 1st Oct 2024) = ₹15,000

• TDS at 2% (from 1st Oct 2024 onwards) = ₹6,000

 

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

Certain life insurance payouts are exempt from TDS under Section 194DA:  

• Exempt Under Section 10(10D): If the policy qualifies for exemption, no TDS is deducted

• Payouts Below a Threshold: Aggregate payouts under  ₹1 Lakh in a financial year

• Death Benefits: Full exemption on amounts received on the death of the insured 

• Exempt Under Section 197: If the policyholder submits a declaration under Section 197 for lower or nil TDS, the insurer may deduct TDS accordingly

• Specific Policy Conditions for Exemption of TDS: 

  • Policies issued after 1st April 2012: If the premium does not exceed 10% of the sum assured

  • Policies issued between 1st April 2003 and 31st March 2012: If the premium does not exceed 20% of the sum assured

Failure to comply with Section 194DA provisions can lead to penalties and interest for the deductor (usually the insurance company): 

• Interest of 1% per month or part of the month for failure to deduct TDS

• Interest of 1.5% per month for failure to deposit the deducted TDS with the government

• Penalties can be equal to the sum of TDS not deposited or deducted, with interest

• In severe cases, prosecution under Section 276B may be initiated for non-compliance

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

• Check TDS deducted in Form 26AS as available on the Income Tax Department’s portal

• If TDS exceeds the actual tax liability, the excess amount can be claimed as a refund

• Policyholders should collect the TDS certificate (Form 16A) as issued from their insurer

• Submit Form 15G or 15H these forms to the insurer to avoid TDS if eligible.​

• Filing returns accurately with correct TDS details is essential for a smooth refund process

The following table clarifies that Section 194DA deals with policy payouts, while Section 194D relates to commission payments in the insurance sector: