Section 194DA: Payment in respect of Life Insurance policy

If the proceeds of life insurance policy are taxable then TDS provisions are applicable. In such cases tax is deducted at source under section 194DA of the Income Tax Act at the rate of 1% at the time of making payment. However, tax is not required to be deducted at source if the amount of proceeds are less than Rs. 1,00,000/-.

Let us understand the above provision with examples:

Example 1:

Mr. Prakash took insurance policy on 27th June, 2012 for Rs. 2,00,000/-. He paid premium of Rs. 50,000/- every year. On 26th June, 2017 he received Rs. 2,25,000/- (including bonus) as the maturity proceeds. State whether TDS provisions are applicable or not.

Policy is taken after 1st April, 2012. Hence, amount of deduction allowed on premium should not exceed 10% of the sum assured. In this case, the sum assured was Rs. 2,00,000/- so amount of premium should not exceed Rs. 20,000/-. However actual premium paid (Rs. 50,000/-) is more than ceiling limit (Rs. 20,000/-). Hence, the proceeds are taxable.

As per Section 194DA, since the proceeds are more than Rs. 1,00,000/- TDS provisions are applicable. Hence the insurance company will deduct TDS @ 1% of Rs. 2,25,000/- i.e. Rs. 2,250/- while making the payment of the maturity proceeds.

Example 2:

Mr. Kumar received Rs. 1,00,000/- as the proceeds of his life insurance policy. Advise him regarding TDS provisions on the proceeds.

Tax is not required to be deducted on the proceeds of insurance policy if the proceeds are less than Rs. 1,00,000/-. In this case, proceeds are Rs. 1,00,000/- hence TDS at 1% i.e. Rs. 1,000/- will be deducted under section 194DA.

Click here to read more about Tax implications of a Life Insurance Policy.