TDS Section 194DA of Income Tax Act for Life Insurance Maturity

TDS Section 194DA of Income Tax Act provides the provision related to deduction of TDS on life insurance maturity amount.

When a person receives their maturity proceeds upon maturity of life insurance policy then the insurance company needs to deduct TDS under section 194DA.

Let’s understand in detail what is the provision related to section 194DA:

 

What is TDS section 194DA of Income Tax Act 1961?

As per TDS section 194DA (Taxability on Life Insurance Maturity amount), any person responsible for making payment of life insurance policy (including any bonus on such policy) to any resident, is liable to deduct TDS under section 194DA at the time of making payment.

Under this section TDS is deducted on maturity proceeds.

Example:

If Mr. A took a life insurance policy from XYZ Ltd company for the sum assured Rs.10,00,000 and period for this policy is 10 years then after expiry of 10 years Mr. A will receive maturity proceeds, let’s say Rs. 12,00,000.

Then XYZ Ltd company is liable to deduct TDS on Rs.12,00,000 (maturity proceeds) at the time of making payment.

But Point to be noted:

• That deductee must be resident as per section 194DA, but deductor (i.e. the insurance company) can be any person (resident or non-resident)
• There is a difference between sum assured and maturity amount. Sum assured is the guaranteed amount that you will receive (does not include bonus). A maturity proceeds includes sum assured and the bonus.

Also Read: Section 194IB: TDS on Rent ofImmovable Property

What are the conditions of deducting TDS under section 194DA of Income Tax Act?

Following are the conditions which need to be considered for TDS section 194DA:

• No TDS to be deducted where amount does not exceed Rs.100000 during a financial year.
• No TDS to be deducted on maturity amount exempt under section 10(10D).

 

What is the exemption under section 10(10D)?

As per section 10(10D) on income tax act 1961:

• Any sum received under life insurance policy issued at any time before 1/04/2012 is exempt, if premium payable does not exceed 20% of sum assured in any year.
• If life insurance policy is issued on or after 1-4-2012 then it is exempt, if premium payable does not exceed 10% of sum assured in any year.
• However, on or after 1-4-2013, policy is taken for a person suffering from disability (section 80U) or specified diseases (section 80DDB) then it is exempt, if premium payable does not exceed 15% of sum assured in any year.
• Amount received on the death is always exempt.
• Sum received under keyman insurance policy is taxable.

Also Read: TDS on Rent | Under Section 194I of Income Tax Act 1961

What is the rate of TDS under section 194DA of Income Tax Act?

TDS rate under section 194DA on life insurance maturity is 5%. TDS is to be deducted after deducting premium paid from total sum maturity proceeds received. It means TDS is deducted on net income (i.e. after deducting premium paid).

 

When to deduct TDS under section 194DA?

Under section 194DA TDS to be deducted at the time of payment of life insurance maturity amount. It is to be deducted by the Insurance Company.

 

How to calculate TDS under section 194DA of Income Tax Act?

For calculation TDS amount following point needs to be considered:

• If the maturity amount is exempt under section 10(10D) then no TDS to be deducted.
• After checking section 10(10D) if maturity amount is not exempted then check the threshold limit of Rs.100000.
• If maturity amount is less than Rs. 100000 then no TDS to be deducted, but if it is Rs. 100000 or more then TDS need to be deducted @5%. 
• For calculating TDS all the premium paid should be deducted from maturity proceeds and then TDS needs to deduct on net amount.

Let’s understand with an example:

Mr. A is a resident and has taken life insurance policy from XYZ Ltd. (Insurance Company). Others details are:

Sum assured = Rs.5,00,000

Period of Policy = 3 years

Premium paid = Rs.1,25,000 (per annum)

Maturity proceed (after 3 years) = Rs.5,50,000

Policy taken on = 1-4-2019 

Solution:

Step 1

Check exemption under section 10(10D). Since policy taken after 1-4-2012 then 10 % of sum assured is Rs. 50000 (Rs.500000*10%)

Hence premium i.e. Rs. 125000 exceeds Rs. 50000 then there is no exemption, so amount is taxable.

Step 2

Since maturity proceeds exceed Rs.100000 (threshold limit), hence TDS needs to be deducted.

Amount of TDS = (Maturity Value – All Premiums paid)

= [Rs.5,50,000 – (Rs.1,25,000*3 years)]

= 5,50,000 – 3,75,000

= 1,75,000 * 5%

Amount of TDS = Rs. 8750

Also Read: Section 194N of Income Tax Act (TDS on Cash Withdrawal)

Conclusion

As per TDS Section 194DA of Income Tax Act for deduction of  TDS provides the provision related to deduction of TDS on life insurance maturity amount @5% after checking the Section 10(10D) and threshold limit of Rs.100000.