Section 194DA – TDS on Life Insurance Policy Proceeds

Introduction

Section 194DA, introduced by the Finance Act, 2014, mandates Tax Deducted at Source (TDS) on certain payments made by life insurance companies to policyholders. This section applies only when the proceeds are taxable, i.e., not exempt under Section 10(10D) of the Income Tax Act, 1961.

Applicability of Section 194DA

This section applies to any person (insurance company) responsible for paying to a resident any sum under a life insurance policy, including bonus, excluding:

• Amount received on death of the insured
• Amount exempt under Section 10(10D)

Taxability of Life Insurance Proceeds

Under section 10(10D) any sum received under a life insurance policy including the sum allocated by way of bonus on such policy is exempt subject to fulfillment of conditions specified under the said section.

If these conditions are not satisfied, the maturity or surrender amount becomes taxable, and TDS under Section 194DA applies.

Types of Life Insurance Receipts

Life insurance proceeds can arise in three situations:

1. Death claim
2. Maturity
3. Surrender

➡ Death claim is always fully exempt, irrespective of premium or policy type.

When Life Insurance Proceeds Are Exempt – Section 10(10D)

1. Regular (Non-ULIP) Policies

Policy Issue Period	Exemption Condition
Before 1 April 2003	Fully exempt in all cases
1 April 2003 – 31 March 2012	Premium ≤ 20% of Sum Assured
On or after 1 April 2012	Premium ≤ 10% of Sum Assured
On or after 1 April 2013 (Disabled / Disease cases – 80U & 80DDB)	Premium ≤ 15% of Sum Assured
On or after 1 April 2023	Aggregate premium ≤ ₹5 lakh per year

2. ULIP Policies

ULIP Issue Period	Exemption Condition
Before 1 Feb 2021	Same limits as regular policies
On or after 1 Feb 2021	Premium ≤ ₹2.5 lakh per year
Above ₹2.5 lakh	Taxable

Special Exemptions

The following receipts are fully exempt:

• Amount received on death of the insured
• Amount received under Section 80DD(3) or 80DDA(3)
• Policies satisfying conditions of Section 10(10D)

Tax Treatment on Maturity / Surrender

Before 1 April 2023

• ULIP issued after 1 Feb 2021 → Taxed under Section 45(1B) & Rule 8AD (No indexation)
• Regular policies → Capital gains or Income from Other Sources (no double deduction)

On or after 1 April 2023

• Taxable under Section 56(2)(xiii)
• No double deduction of premium allowed

Foreign Life Insurance Policies

• Foreign ULIPs – Not covered under Section 10(10D)
• Other foreign policies – No explicit clarification; taxability depends on facts

NRI Policyholders

• Resident policyholder → Section 194DA
• Non-resident policyholder → Section 195 (TDS as per applicable rates)

Rate of TDS – Section 194DA

TDS is deducted only on the income portion, not on the entire proceeds (Income portion = Maturity value – Total premium paid)

TDS Rates

• 5% – Applicable up to 30 September 2024
• 2% – Applicable from 1 October 2024 onwards
• 20% – If PAN is not furnished

Threshold Limit

• TDS applies only if total payment in a financial year is ₹1,00,000 or more
• If proceeds are below ₹1 lakh, no TDS is required

Who Is Required to Deduct TDS?

The insurance company making payment to the policyholder.

Example – TDS Calculation

Mr. X receives maturity proceeds of ₹4,50,000

• Total premium paid: ₹2,00,000
• Income portion: ₹4,50,000 – ₹2,00,000 = ₹2,50,000

TDS will be deducted on ₹2,50,000 only, not on ₹4,50,000.

Case	Maturity Proceeds	Premium Paid	Taxable Portion	TDS Applicable	TDS Amount
Non-exempt policy (> ₹1 lakh)	₹12,00,000	₹8,00,000	₹4,00,000	Yes	₹20,000
Proceeds < ₹1 lakh	₹95,000	₹80,000	₹15,000	No	Nil
Death claim	₹10,00,000	₹6,00,000	Fully exempt	No	Nil

Section 10(10D) – Income Tax Exemption (AY 2025-26)

Policy Type & Issue Date	Premium Limit for Exemption	Example	Tax Exemption Status
Policies issued 1-Apr-2003 to 31-Mar-2012	≤ 20% of Sum Assured per year	Sum Assured: ₹5 lakh Premium: ₹1 lakh/year (20%)	Exempt if premium ≤ ₹1 lakh/year
Policies issued on/after 1-Apr-2012	≤ 10% of Sum Assured per year	Sum Assured: ₹5 lakh Premium: ₹50,000/year (10%)	Exempt if premium ≤ ₹50,000/year
Policies for disabled / disease (after 1-Apr-2013)	≤ 15% of Sum Assured per year	Sum Assured: ₹5 lakh Premium: ₹75,000/year (15%)	Exempt if premium ≤ ₹75,000/year
ULIPs issued on/after 1-Feb-2021	≤ ₹2.5 lakh total premium/year	Premium: ₹2 lakh/year	Exempt if premium ≤ ₹2.5 lakh/year
Non-ULIP policies issued on/after 1-Apr-2023	≤ ₹5 lakh aggregate premium/year	Premium: ₹4 lakh/year (single or multiple policies)	Exempt if total premium ≤ ₹5 lakh/year
Death benefit (any policy)	No limit	Any sum received on death of insured	Always exempt

Section 194DA – Quick Summary

Particulars	Details
Section	194DA
Nature of Payment	Taxable Life Insurance Proceeds
Deductor	Insurance Company
Deductee	Resident Policyholder
Threshold	₹1,00,000
TDS Rate	5% (till 30-09-2024) / 2% (from 01-10-2024)
Higher TDS	20% if PAN not provided
Exemption	Death claim & amounts exempt u/s 10(10D)
Time of Deduction	At the time of payment

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