Section 194D of the Income Tax Act mandates TDS (Tax Deducted at Source) on insurance commissions paid to agents and brokers. As of Budget 2024, the TDS rate on insurance commissions has been reduced to 2% from the previous rate of 5%. This change aims to provide relief to insurance agents and promote the insurance sector.
Eligibility for tax deduction under section 194D
TDS must be deducted by the entity making the payment by way of remuneration, reward, or commission for:
- Soliciting or obtaining insurance business
- Continuance, renewal, or revival of insurance policies
Section 194D applies only to Indian residents, including individuals, Hindu Undivided Families (HUFs), companies, and other taxpayers. TDS on insurance commissions paid to non-residents in India falls under Section 195.
TDS Deduction Timing
Tax under section 194D is to be deducted at the earlier of the following events:
- At the time of crediting the commission to the payee’s account
- When the payment is made in cash, cheque, or kind
Rate of TDS Under Section 194D
Section 194D applies to residents, regardless of whether they are individuals, companies, or any other category. The TDS rates under Section 194D are as follows:
- 2% for people who are not companies (as per the latest update)
- 10% for domestic companies
- 20% if the deductee has not provided a valid PAN
Surcharge and cess will not be added to the above TDS rate. This means that the TDS amount should be calculated at a rate of 5% or 10%, depending on the case.
Exemptions from TDS deduction under section 194D
TDS is not necessary if the total insurance commission paid during the financial year is below Rs. 15,000 (previously Rs. 20,000 until May 31, 2016).
Individuals, excluding companies and firms, can submit a declaration in Form 15G to the insurance company if their total income is not taxable. In this case, no tax will be deducted. Senior citizens can use Form 15H for similar purposes.
It’s important to note that Forms 15G and 15H must include a Permanent Account Number (PAN) to be valid. If the forms are invalid, the tax deduction rate will be 20%.
Application for Lower TDS
Individuals receiving commission can apply using Form 13 to the Assessing Officer for a certificate authorizing the payer to either not deduct any tax or to deduct at a lower rate. Note that the application must include the individual’s PAN.
If granted, this certificate allows the payee to receive the insurance commission without tax deduction or at a reduced rate.
Due Dates for TDS
- Deposit TDS: By the 7th of the following month after the commission payment.
- TDS Certificates are issued by the following deadlines:
- 15th August for the period April-June
- 15th November for July-September
- 15th February for October-December
- 15th June for January-March
Frequently Asked Questions (FAQs)
Who is responsible for deducting TDS under Section 194D?
Any person or entity making payments for commissions related to soliciting insurance business must deduct TDS under Section 194D.
What is the maximum limit for exemption from TDS?
No TDS needs to be deducted if the total insurance commission paid in a financial year is below Rs. 15,000.
Does Section 194D cover reinsurance commissions?
No, Section 194D does not apply to reinsurance commissions.
What was the exemption limit before June 1, 2016?
Before June 1, 2016, the exemption limit for TDS deduction was Rs. 20,000 in a financial year.
How does Section 194DA differ from Section 194D?
Section 194D deals specifically with TDS on commissions received by insurance agents or brokers, while Section 194DA pertains to TDS on income earned from the maturity of life insurance policies, including bonuses.
