Section 194DA of the Income Tax Act mandates the deduction of TDS on maturity proceeds of life insurance policies that are not exempt under Section 10(10D). This provision ensures tax compliance on non-exempt life insurance payouts received by policyholders.
Key Provisions of Section 194DA
1. Time of Deduction – TDS is required to be deducted at the time of payment of the maturity proceeds.
2. Deductor – Any person making a maturity payment in respect of a life insurance policy is responsible for deducting TDS.
3. Deductee – The payment must be made to a resident policyholder. If the payment is made to a non-resident, TDS shall be deducted under Section 195 instead.
4. TDS Deduction Rate: Latest Update
As per the Budget 2024 update, effective from 1st October 2024, the TDS rate on maturity payments has been reduced from 5% to 2%. The updated TDS rates are as follows:
| Period | TDS Rate |
|---|---|
| Before 01/10/2024 | 5% |
| On or after 01/10/2024 | 2% |
| If PAN is not provided | 20% |
5. Threshold for TDS Deduction
TDS under Section 194DA is applicable only if the aggregate maturity proceeds exceed ₹1,00,000 in a financial year.
Example Illustration
Scenario: Mr. Venkat receives a maturity amount of ₹7.5 lakh from his life insurance policy. Over a period of 10 years, he has paid a total premium of ₹2.5 lakh.
- TDS portion of maturity proceeds = ₹7.5 lakh – ₹2.5 lakh = ₹5 lakh.
- Since the maturity amount exceeds ₹1 lakh, TDS will be applicable.
- Before 1st October 2024: TDS at 5% on ₹5 lakh → ₹25,000 deducted.
- On or after 1st October 2024: TDS at 2% on ₹5 lakh → ₹10,000 deducted.
- Net amount received by Mr. Venkat after deduction:
- Before 1st October 2024: ₹7,25,000
- On or after 1st October 2024: ₹7,40,000
Cases When TDS Shall Not Be Deducted
TDS under Section 194DA is not applicable in the following cases:
- Exemptions under Section 10(10D) — If the maturity proceeds qualify for exemption under Section 10(10D), no TDS is required.
- Declaration under Section 197A — If the recipient submits a declaration in Form 15G or Form 15H, TDS deduction can be avoided.
Understanding Exemptions Under Section 10(10D)
Section 10(10D) provides an exemption for sums received under a life insurance policy, including bonuses, subject to the following conditions:
TDS Exemption is Not Available If:
- The amount is received under Section 80DD(3) or 80DDA(3).
- The amount is received under a Keyman Insurance Policy.
- The LIC policy was issued between 1st April 2003 and 31st March 2012, and the premium exceeds 20% of the sum assured.
- The LIC policy was issued after 1st April 2012, and the premium exceeds 10% of the sum assured.
- The LIC policy was issued after 1st April 2013 for a person with a disability (under Section 80U) or for ailments covered under Section 80DDB, and the premium exceeds 15% of the sum assured.
- There is no maximum limit for exemption under Section 10(10D), provided that the above conditions are met.