Sec 194DA: TDS on sum received under life insurance policy

Sec 194DA: TDS on sum received under life insurance policy

1.       What is the amendment in the sec 194DA as per finance bill, 2019?

In section 194DA of the Income-tax Act, for the words “one per cent”, the words“five per cent on the amount of income comprised therein” shall be substituted with effect from the 1st day of September, 2019.

2.       Discuss the provision of section 194DA before amendment by finance bill, 2019?

Under section 194DA of the Act, a person is obliged to deduct TDS, if it pays any sum to a resident under a life insurance policy which is not exempt under sec 10 (10D). At present, TDS is required to be deducted @ 1% on such sum at the time of payment. However, TDS is not deductible if the amount of such payment is less than one lakh rupees.

As per Section 10(10D), any sum received under life insurance policy, including the sum allocated by way of bonus on such policy, is exempt in any of the following cases:

i.      If the premium payable for any financial year is less than 10% of the actual sum assured (i.e. sum insured excluding bonus) in case the policy is issued on or after 01/04/2012

ii.    If the premium payable for any financial year is less than 20% of the actual sum assured (i.e. sum insured excluding bonus) in case the policy is issued on or after 01/04/2003 but before 31/03/2012.

iii.   If the premium payable for any financial year is less than 15% of the actual sum assured (i.e. sum insured excluding bonus) in case the policy is issued on or after 01/04/2013 and on the life of any person who is –

a)       a person with disability or a person with severe disability as referred to in section 80U; or

b)      suffering from disease or ailment as specified in the rules made under section 80DDB

iv.  If any sum is received due to the death of the policy holder.

3.       Discuss briefly the tax treatment on the sum invested in life insurance policy.

We can say in general that the maturity proceeds under life insurance policy shall be deemed to be a taxable income of the recipient if the premium paid for any financial year exceeds 10% of the actual sum insured. The insurer shall also deduct TDS @1% on the maturity proceeds payable if the amount of such payment is more than one lakh rupees. As far as the policy holder is concerned, his maturity proceeds is taxable as other income and he gets deduction of the premium paid under section 80C from his Gross Total Income subject to the limit of 10% of the actual sum insured. 

4.       What is the logic behind the amendment in sec 194DA?

Several concerns have been expressed regarding deducting TDS on the gross amount received. It creates difficulties to assessee who otherwise has to pay tax on the net income (i.e. total sum received less amount of insurance premium paid). From the point of views of tax administration as well, it is preferable to deduct tax on net income so that the income as per TDS return of the deductor can be matched automatically with the return of income filed by the assessee. The person who is paying a sum to a resident under a life insurance policy is aware of the amount of insurance premium paid by the assessee. Hence, it is proposed to provide for tax deduction at source at the rate of 5% on income component of the sum paid by the person.

In section 194DA, it is proposed to make amendment in such a way that TDS liability would be based on income comprised in payment amount instead of entire payment amount, by increased rate of 5% instead of present rate of 1%. It is to be noted that proviso to this section is not changed, so still the threshold limit for the purpose of TDS applicability is based on “amount of such payment” and not “income component” only. At present threshold is less than Rs. 1 Lakhs.

5.       Give an example of sec 194DA.

Particulars	Policy issued after 01/04/2012	Policy issued before 31/03/2012	Policy issued after 01/04/2013 (80DDB /80U case)
Sum Insured	Rs.                 15,00,000.00	Rs.                 15,00,000.00	Rs.            15,00,000.00
Annual Premium	Rs.                    1,45,000.00	Rs.                   3,20,000.00	Rs.               2,50,000.00
Percentage of sum insured	9.67%	21.33%	16.67%
Life (in yrs)	7.00	4.00	6.00
Maturity Proceeds received	Rs.                 15,50,000.00	Rs.                 15,30,000.00	Rs.            15,25,000.00
Exempt under 10(10D)/Taxable as other income	Exempt	Taxable	Taxable
Income	Rs.                    5,35,000.00	Rs.                   2,50,000.00	Rs.                  25,000.00
(Difference of Maturity proceeds and Premium paid)
TDS under section 194DA before ammendment	Rs.                                       -	Rs.                       15,300.00	Rs.                  15,250.00
TDS under section 194DA after ammendment	Rs.                                       -	Rs.                       12,500.00	Rs.                     1,250.00

Annexure:

Full provision of Sec 194 DA

Any person responsible for paying to a resident any sum under a life insurance policy, including the sum allocated by way of bonus on such policy, other than the amount not includible in the total income under clause (10D) of section 10, shall, at the time of payment thereof, deduct income-tax thereon at the rate of 5% on the amount of income comprised therein.

Provided that no deduction under this section shall be made where the amount of such payment or, as the case may be, the aggregate amount of such payments to the payee during the financial year is less than one hundred thousand rupees.

Full provision of Sec 10(10D)

Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than—

(a)  any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA; or

(b)  any sum received under a Keyman insurance policy; or

(c)  any sum received under an insurance policy issued on or after the 1st day of April, 2003 but on or before the 31st day of March, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured; or

(d)  any sum received under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured:

Provided that the provisions of sub-clauses (c) and (d) shall not apply to any sum received on the death of a person:

Provided further that for the purpose of calculating the actual capital sum assured under sub-clause (c), effect shall be given to the Explanation to sub-section (3) of section 80C or the Explanation to sub-section (2A) of section 88, as the case may be :

Provided also that where the policy, issued on or after the 1st day of April, 2013, is for insurance on life of any person, who is—

 (i)  a person with disability or a person with severe disability as referred to in section 80U; or

(ii)  suffering from disease or ailment as specified in the rules made under section 80DDB,

the provisions of this sub-clause shall have effect as if for the words "ten per cent", the words "fifteen per cent" had been substituted.

Explanation 1.—For the purposes of this clause, "Keyman insurance policy" means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration;

Explanation 2.—For the purposes of sub-clause (d), the expression "actual capital sum assured" shall have the meaning assigned to it in the Explanation to sub-section (3A) of section 80C;