Yes, TDS (Tax Deducted at Source) is applicable on certain insurance-related payments and benefits, particularly for life insurance, under specific conditions in India.
Understanding TDS on Life Insurance Proceeds
TDS applies to various sources of income in India, including certain payouts from life insurance policies. When the maturity proceeds or surrender value of a life insurance policy are taxable, the insurer is required to deduct TDS before making the payment to the policyholder. This is primarily governed by Section 194DA of the Income Tax Act, 1961.
Key Scenarios for TDS on Life Insurance Payouts:
- Taxable Maturity/Surrender Proceeds: If a life insurance policy's maturity amount, including bonus, or its surrender value, is not exempt under Section 10(10D) of the Income Tax Act, then TDS is applicable. This typically happens when:
- The premium payable for any year during the policy term exceeds 10% (for policies issued on or after April 1, 2012) or 15% (for policies issued between April 1, 2003, and March 31, 2012) of the actual capital sum assured.
- For Unit-Linked Insurance Plans (ULIPs) issued on or after February 1, 2021, if the aggregate annual premium exceeds ₹2.5 lakh, the income portion from such policies becomes taxable, and TDS applies.
- For non-ULIPs issued on or after April 1, 2023, if the aggregate annual premium exceeds ₹5 lakh, the income portion from such policies becomes taxable, and TDS applies.
- Death Claims: It is important to note that proceeds from life insurance policies received on the death of the insured are fully exempt from tax under Section 10(10D) and are therefore not subject to TDS.
- TDS Rate: The TDS rate on taxable life insurance proceeds (income component) is generally 5%. If the policyholder does not provide a PAN (Permanent Account Number), a higher TDS rate may apply.
TDS on Insurance Premiums (Specific Context)
While TDS is primarily associated with income received, certain specific procedures relate to premium payments. TDS is applicable to various sources of income in India, including life insurance. The procedure for TDS on life insurance can also involve the deduction of tax at the time of payment of the premium and the issuance of a TDS certificate to the policyholder. This can occur in situations where an entity pays a premium for another, and this premium is considered a taxable benefit or perquisite for the policyholder. For instance, if an employer pays the premium for an employee's life insurance policy, this premium amount might be treated as a perquisite in the employee's hands. The employer, while paying the premium, might deduct TDS from the employee's salary or other income, considering it as a taxable component, and then issue a TDS certificate to the employee (policyholder).
Other Instances of TDS in the Insurance Sector
Beyond life insurance payouts, TDS can be applicable in various other transactions within the insurance industry:
- Insurance Commission (Section 194D): Insurers are required to deduct TDS on any commission (including remuneration or reward) paid or payable to an insurance agent for soliciting or procuring insurance business.
- Threshold: If the commission exceeds ₹15,000 in a financial year.
- Rate: 5% for individuals/HUF, 10% for others.
- Payments to Contractors (Section 194C): If an insurance company engages contractors for various services (e.g., repairs, facility management, IT services), TDS may apply on payments exceeding specified thresholds.
- Rent Payments (Section 194I): If an insurance company pays rent for its office premises or other property, TDS is applicable if the annual rent exceeds the prescribed limit.
Summary of Key TDS Sections Related to Insurance
To simplify understanding, here's a table summarizing common TDS provisions relevant to the insurance sector:
| Section | Applicable On | TDS Rate (Illustrative) |
|---|---|---|
| 194DA | Taxable Life Insurance Policy Payouts (Maturity/Surrender Value) | 5% on the income component |
| 194D | Commission to Insurance Agents | 5% (Individual/HUF), 10% (Others) if > ₹15,000/year |
| 194C | Payments to Contractors (by Insurer) | 1% (Individual/HUF), 2% (Others) if > ₹30,000 (single) or ₹1,00,000 (aggregate) |
| 194I | Rent Payments (by Insurer) | 10% (Plant/Machinery), 10% (Land/Building/Furniture) if > ₹2,40,000/year |
Understanding these TDS provisions is crucial for both insurance companies and policyholders to ensure compliance with tax laws and proper tax planning.
