Section 194DA of the Income Tax Act, 1961, mandates Tax Deducted at Source (TDS) on payouts from life insurance policies that do not qualify for exemption under Section 10(10D). This ensures tax compliance on taxable maturity proceeds, bonuses, and surrender values.
1. Applicability of Section 194DA
✅ Covered Payments:
- Maturity proceeds(including bonuses).
- Surrender value(if policy is terminated early).
- Partial withdrawals(if treated as income).
❌ Exempt Payments:
- Death benefits(always tax-free).
- Policies exempt under Section 10(10D)(e.g., premiums ≤10% of sum assured for post-2012 policies).
- Payouts ≤ ₹1 lakhin a financial year.
2. TDS Rate & Calculation
| PARAMETER | DETAILS |
| Current Rate (2024-25) | 5% (on income portion = Payout – Premiums Paid) |
| From Oct 1, 2024 | Reduced to 2% (Budget 2024 update). |
| PAN Not Provided | 20% TDS (under Section 206AA) |
Example:
- Payout: ₹10 lakh | Premiums Paid: ₹7 lakh
- Taxable Income: ₹3 lakh
- TDS (5%): ₹15,000 → Net Receipt: ₹9.85 lakh.
3. Who Deducts TDS?
- Life insurance companies(e.g., LIC, private insurers).
- Due Date: Deduct at time of payment; deposit by 7th of next month(March: April 30).
4. Exemptions Under Section 10(10D)
No TDS if:
- Death claims(regardless of premium).
- Premiums ≤10% of sum assured(post-2012 policies).
- Keyman insurance policies.
- Disability-related policies(premium ≤15% of sum assured).
5. Compliance & Penalties
- For Insurers:
- Late TDS: Interest @ 1% per month.
- Non-Deduction: Penalty = TDS amount + prosecution.
- For Policyholders:
- Claim Refund: File ITRif TDS deducted incorrectly.
- Form 15G/15H: Submit to avoid TDS if income is below taxable limits.
6. Key Changes (Budget 2024)
- TDS Rate Reduction: From 5% → 2%(effective Oct 1, 2024).
- New Taxability Rule: Policies bought after April 1, 2023, with premiums > ₹5 lakh/year, are fully taxable(no Section 10(10D).
Key Points
🔹 TDS applies only to taxable payouts (exempt policies excluded).
🔹 Provide PAN to avoid 20% deduction.
🔹 Post-2023 high-premium policies may lose exemptions.
