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Understanding Section 194 DA

TeamAckoNov 2, 2023

Section 194 DA of the Income Tax Act, of 1961, deals with the taxation of life insurance payments. Unless the policy is exempt under Section 10(10D) of the Income Tax Act, any payment toward a life insurance policy must be subject to tax at source (TDS).

It is important to understand Section 194 DA as it imposes a legal obligation on the payer to deduct and deposit the TDS with the government. Non-compliance with the section provisions can attract penalties and interest. Moreover, understanding Section 194 DA can help taxpayers plan their tax liabilities better and avoid compliance issues. 

As a taxpayer you also need to know the exemptions and deductions available under the section. This is to ensure you don't pay more tax. Therefore, a thorough understanding of Section 194 DA is crucial for all taxpayers who pay towards life insurance policies.

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Contents

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Key provisions of Section 194 DA

Some of the key provisions of Section 194 DA are as follows.

TDS rate

The TDS rate under Section 194 DA may vary depending upon the policy and their premium paid.

Threshold limit

TDS is applicable only if the payment towards the life insurance policy exceeds Rs. 1 lakh in a financial year.

Time of deduction

TDS is to be deducted at the time of payment of the policy amount or any sum under the policy, whichever is earlier.

Non-applicability

TDS is not applicable to payments made towards life insurance policies exempt under Section 10(10D) of the Income Tax Act.

Difference between Section 194 D and Section 194 DA 

Here are some key differences.

CRITERIA

SECTION 194 D

SECTION 194 DA

Applicable to

Payment of any sum deposited under a life insurance policy (excluding sum allocated for bonuses or profits received by policyholders)

Payment made towards a life insurance policy not exempt under Section 10(10D) of the Income Tax Act

Coverage

Applies to any payment made under a life insurance policy

Applies only to payments received towards policies not exempt under Section 10(10D)

Applicable to

Any person

Any person (excluding individuals and HUFs)

Time of Deduction

Upon payment or credit, whichever comes first

Upon payment or credit, whichever comes first

Applicable Form

Form 15G/15H

Form 15G/15H (if applicable) or Form 15I

Note that Form 15G/15H is used by individuals and HUFs to declare that their income is below the taxable limit, while Form 15I is used by other taxpayers.

Procedure for deducting and depositing TDS 

The procedure for deducting and depositing TDS under Section 194 DA is as follows:

  • The payer should obtain a valid PAN from the payee.

  • The payer will be deducted TDS at the rate of 5% only on the income part of the payment made towards the life insurance policy if it exceeds Rs. 1 lakh in a financial year.

  • If the maturity amount is above Rs. 1 Lakh, the maturity proceeds paid after deducting 5% TDS.

  • The TDS should be deposited with the government within 30 days of the end of the month the deduction was made.

  • The payer should issue a TDS certificate to the payee in Form 16A.

  • It is important for the payer to comply with the TDS provisions under Section 194 of DA to avoid penalties and interest.

Exemptions and deductions under Section 194 DA

Exemptions available under Section 194 DA, TDS are not applicable to payments made towards life insurance policies exempt under Section 10(10D) of the Income Tax Act. These exemptions include.

Maturity proceeds

Any sum received under a life insurance policy, including bonus, that is exempt under Section 10(10D) is not subject to TDS.

Death benefits

Any sum received by a nominee or legal heir on the death of the policyholder, including a bonus, is exempt under Section 10(10D) and not subject to TDS.

Surrender value

Any sum received as the surrender value of the policy, including bonus, is exempt under Section 10(10D) and not subject to TDS.

Compliance requirements under Section 194 DA

The compliance requirements under Section 194 DA are as follows

Deduction and deposit of TDS

The TDS deducted needs to be deposited with the government within 30 days from the end of the month in which the deduction was made. The policyholder can claim credit for this TDS while filing their income tax return.

Issuance of TDS certificate

The payer is required to issue a TDS certificate to the payee in Form 16A within 15 days from the due date of depositing TDS with the government.

Filing of TDS return

The payer is required to file a quarterly TDS return in Form 26Q with the government, providing details of the TDS deducted and deposited.

Penalties for non-compliance with Section 194 DA

Non-compliance with Section 194 DA can attract penalties and interest. Listed below are the penalties for non-compliance

  1. Interest: Payers who fail to deposit TDS within the due date are charged interest at a rate of 1.5% per month or part of a month until the deposits are made.

  2. Penalty for late TDS return filing: In case of non-filing of the TDS return by the due date, the payer will be penalised Rs. 200 per day until the return is filed.

  3. Penalty for incorrect information: If the payer provides incorrect information in the TDS return, a penalty ranging from Rs. 10,000 to Rs. 1 lakh can be levied.

It is mandatory for payers to comply with Section 194 of DA to avoid penalties and interest. Non-compliance can also result in additional tax liability for the payee, who may have to pay an additional tax to make up for the TDS not deducted by the paye. Adhering to Section 194 DA is a necessity for both payers and payees. Payers must ensure TDS is deducted and deposited on time to avoid penalties or interest. Payees must ensure that they claim credit for the TDS deducted while filing their income tax return to avoid additional tax liability. Non-compliance with Section 194 DA can attract penalties and interest, resulting in additional tax liability for both payers and payees.

Frequently Asked Questions

Here are the answers to the most asked common questions related to Section 194 DA

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Is TDS under Section 194 DA applicable only to Indian insurance policies?

No, TDS under Section 194 DA applies to all life insurance policies, whether issued by Indian insurance companies or foreign insurance companies.

Are maturity proceeds of life insurance policies subject to TDS under Section 194 of DA?

No, TDS under Section 194 applies only to the sum received as a payout during the policy term. Life insurance proceeds are not subject to TDS under this section.

Can the TDS deducted under Section 194 DA be adjusted against the final tax liability?

Yes, the TDS deducted under Section 194 DA can be adjusted against the final tax liability of the payee while filing their income tax return.

What happens if the TDS deducted under Section 194 DA is higher than the actual tax liability?

If the TDS deducted under Section 194 DA is higher than the actual tax liability of the payee, they can claim a refund for the excess amount. This is while filing their income tax return.

Is there any threshold limit for TDS under Section 194 of DA?

Yes, TDS under Section 194 DA is applicable only if the sum received as a payout during the policy term exceeds Rs. 1 lakh in a financial year. In the case of payments less than Rs. 1 lakh, no TDS is required.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.

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