Section 194DA of the Income Tax Act: TDS on Insurance Payouts

Section 194DA of the Income Tax Act mandates TDS on life‐insurance payouts containing income components (bonuses/loyalty). When such payouts exceed ₹1,00,000 and are not exempt under Section 10 (10D), insurers must deduct tax at source before releasing funds.

Rahul received a life insurance payout of ₹12,00,000. He had paid ₹8,00,000 in total premiums. This means his taxable income from the policy was ₹4,00,000. Since Rahul had provided his PAN, the insurer deducted TDS at 5% on the income portion, ₹20,000. So Rahul got ₹11,80,000 in hand.

If Rahul had not provided his PAN, the TDS would have been much higher, 20% of ₹4,00,000 (₹80,000). Fortunately, in April 2025, the insurer confirmed his PAN, and only 5% was applied. Later, in October 2024, the Budget reduced the rate to 2%, which applied to future payouts.

Mrs. Priya, Rahul’s friend, also received a life insurance payout in January 2025. Here’s how her case played out:
 

As her TDS was correctly deducted and reported under Section 194DA, Mrs. Priya laughed and told Rahul, “Bade bhaiya, mohabbat hai in sab kanoon se!”, a nod to a classic Bollywood line.

Section 194DA of Income Tax Act: Introduction

Section 194DA of Income Tax Act was introduced in 2014. It ensures that any payment from a life insurance policy, where the payout has an income component, is taxed at the time of receiving it.

This section was made to stop tax evasion and make people follow tax rules better. The tax is not on the full payout, but only on the income part (like bonus or gains), and only when the total payout is more than ₹1,00,000 in a financial year.

To understand it better, here’s a simple table showing two examples where Section 194DA was applied:
 

In Rahul’s case, TDS was cut at 5% because it was before October 2024. For Priya, the new reduced rate of 2% was used, as her payout happened after the Budget 2024 change.

Section 194DA of Income Tax Act makes sure that tax is deducted correctly on such incomes.

Importance of Section 194DA of Income Tax Act

Section 194DA of Income Tax Act was created to prevent tax evasion by catching income components in insurance payouts. When such payouts exceed ₹1 lakh, TDS must be deducted. 

Compliance under Section 194DA of Income Tax Act is ensured by insurers, who deposit with government. “Picture abhi baaki hai, mere dost,” can be recalled when insurers ensure follow‑up compliance.

Objectives of Section 194DA of Income Tax Act

The main purpose behind introducing Section 194DA of Income Tax Act was to ensure transparency and accountability in life insurance policy payouts, mainly when those payouts include a gain or income element. Here is a more detailed look at its key objectives:

1. Ensure Tax is Deducted on Income from Insurance: 

Many life insurance policies not only return the premiums paid but also offer additional income in the form of bonuses or gains. This income is taxable unless the policy falls under certain exemptions. 

Section 194DA of Income Tax Act was introduced so that tax is deducted before the money reaches the policyholder. This prevents the possibility of people forgetting or avoiding the payment of tax on such earnings.

For example, Ajay, a 35-year-old engineer, received ₹3,00,000 as a maturity amount. His actual premium paid was only ₹1.8 lakh. The income of ₹1.2 lakh was taxable, so the insurance company deducted TDS under Section 194DA.

2. Improve Compliance and Reporting: 

By making the insurance company responsible for deducting and depositing the TDS, the government made tax collection easier and more reliable. It reduced the burden on individuals and ensured that more people followed tax rules. It also improved the accuracy of reporting, as all deductions are linked to PAN and shown in Form 26AS.

Example: Mr. Raj received a life insurance payout of ₹10,00,000. Out of this, ₹7,00,000 was paid as premium. So, the taxable income = ₹3,00,000. The insurer deducted 5% TDS = ₹15,000 and deposited it with the government. 

This amount appeared in Raj’s Form 26AS, making compliance and reporting easy. Without this rule, Raj might have forgotten to report this income.

3. Simplify TDS Tracking via Form 26AS: 

When the insurer deducts TDS under Section 194DA of Income Tax Act, the details appear in the taxpayer’s Form 26AS. This makes it easy for the individual to keep track of what tax has already been paid and helps during ITR (Income Tax Return) filing. 

It reduces mistakes and avoids double taxation. As the great dialogue from Hera Pherisays, "Utha le re baba!", the government doesn’t want to take risks anymore and wants to deduct what is needed right at the source.

Example: Mrs. Kavita received ₹5,00,000 as payout, with ₹3,00,000 in premiums. Taxable income = ₹2,00,000. The insurer deducted 2% TDS = ₹4,000 (after Budget 2024 changes) and it was recorded in Form 26AS. Later, while filing her ITR, she easily confirmed that TDS was already paid, avoiding any duplicate tax payment or error.

So overall, Section 194DA of Income Tax Act was designed to make tax deduction fair, timely, and traceable.

TDS Rate Under Section 194DA of Income Tax Act
 

Exemption Under Section 194DA of Income Tax Act:

Payouts exempt from TDS under Section 194DA of Income Tax Act include:

• Payouts ≤ ₹1 lakh.
   
• Policies exempt under Section 10(10D).
  
  Table 2 below outlines exemptions:
   

Due Date and Compliance Requirements of Section 194DA of Income Tax Act:

Under Section 194DA of Income Tax Act:
 

Failure to comply brings interest and penalty.

Practical Examples of Section 194DA of Income Tax Act:

Example‑1: Sita received ₹1.5 lakh payout, income ₹50,000. After Oct 2024, 2 % ⇒ ₹1,000 deducted.

Example‑2: Mohan’s payout ₹90,000 – no TDS (≤ ₹1 lakh).

Example‑3: Geeta, no PAN, payout income ₹2 lakh ⇒ 20 % ⇒ ₹40,000. 
 

Conclusion of Section 194DA of Income Tax Act

Section 194DA of Income Tax Act ensures tax is deducted at source from life insurance payouts with income components. It promotes compliance and transparency. With rate reduction to 2 %, policyholders get more payout. 

PAN should always be provided. “Ek baar jo maine commitment kar di, uske baad toh main khud ki bhi nahi sunta,” echoes how insurers stick to rules under Section 194DA of Income Tax Act.

FAQs of Section 194DA of Income Tax Act

Q1: What is Section 194DA of Income Tax Act?
It mandates TDS on life insurance payouts including income over ₹1 lakh.

Q2: Who deducts TDS under Section 194DA?
Life insurance companies.

Q3: What if PAN not provided?
TDS at 20 % instead of 2 % or 5 % under Section 194DA of Income Tax Act.

Q4: Are death claims exempt?
Yes, under Section 10(10D), they are exempt from Section 194DA.

Q5: What is the new TDS rate under Section 194DA?
2 % from 1 October 2024.

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