TDS on Life Insurance Policy Payments
Introduction
Tax Deducted at Source (TDS) must be deducted on payments made under a life insurance policy to residents under Section 194DA. The TDS rate is 2% on the income component within the payment amount. TDS applies only if the gross payout (including bonus) is Rs. 1 lakh or more in a financial year.
Applicability
- Deductor– Any person making payments under a life insurance policy.
- Deductee– Resident recipients of insurance proceeds. Payments to non-residents are subject to TDS under Section 195.
Rate of TDS
- Flat 2% on the income component.
- Higher TDS rates apply underSection 206AAif PAN is not provided.
Time of Deduction
TDS is deducted at the time of payment.
Threshold Limit
No TDS is required if the total payout (including bonus) in a financial year is less than Rs. 1 lakh.
Compliance Requirements
- Lower/Nil Deduction Certificate:Deductees may file Form 15G/15H for nil TDS under Section 197A (not Section 197).
- TDS Deposit:Deducted tax must be deposited via Challan ITNS 281 within 7 days of the month-end (except for March, due by 30th April). Government offices depositing TDS without a challan must deposit the TDS on the same day on which the tax was deducted.
- TDS Returns:The deductor must file Form 26Q quarterly.
- TDS Certificate:Form 16A must be issued within 15 days of filing TDS returns.
Consequences of Non-Compliance
- Failure to deduct/deposit TDS– Interest under Section 201, penalty under Section 271C, and prosecution under Section 276B.
- Failure to file TDS returns– Late fee of Rs. 200 per day under Section 234E and penalty under Section 271H.
- Failure to issue TDS certificates– Penalty under Section 272A.