Section 194D - TDS on Insurance Commission

Insurance commission is the income earned by an agent or a broker for soliciting or procuring insurance business, including business relating to continuance, renewal, or revival of policies of insurance.

The insurance company, policyholder, or any other person pays this commission.

Insurance commission is taxable in the recipient's hands under the head "Income from Other Sources" as per Section 56 of the Income Tax Act, 1961. The recipient has to report the gross amount of insurance commission received during the financial year and claim the deduction for any expenses incurred for earning such income under Section 57.

The payer of the insurance commission is liable to deduct TDS under Section 194D before making the payment to the recipient. The payer has to deposit the TDS amount to the government within the prescribed time limit and file the TDS return. The payer also has to issue a TDS certificate to the recipient in Form 16A.

There is a difference between insurance commission and insurance brokerage. Insurance commission is paid to an agent who acts on behalf of the insurance company and is authorised to issue policies.

Insurance brokerage is paid to a broker who acts on behalf of the policyholder and is not authorised to issue policies. Insurance brokerage is not covered under TDS Section 194D and is subject to TDS under Section 194H.

Any person who is responsible for making payment of insurance commission to a resident person is liable to deduct TDS under Section 194D of the Income Tax Act. This includes:

• Any insurance company, whether Indian or foreign

• Any person who has taken an insurance policy in the name of another person

• Any person who is not an insurance agent but is authorised to collect insurance premiums on behalf of an insurance company

• However, there are some exceptions and exemptions from TDS deduction under Section 194D. These are:

• No TDS is required if the aggregate amount of insurance commission paid or credited in a financial year does not exceed ₹15,000.

• No TDS is required if the recipient of the insurance commission furnishes a declaration in Form 15G or Form 15H, as applicable, to the payer, stating that his or her income is below the taxable limit.

• No TDS is required if the recipient of the insurance commission obtains a certificate from the Assessing Officer under Section 197, authorising the payer not to deduct tax or to deduct tax at a lower rate.

The rate of TDS on insurance commission depends on whether the recipient is a domestic company or any other resident person. The current rates are as follows:

• For domestic companies, the rate of TDS is 10%.

• For other resident persons, the rate of TDS is 5%.

These rates are applicable from 1st April 2021 onwards. Earlier, the rates were 10% and 3.75%, respectively, for payments made from 14th May 2020 to 31st March 2021. The reduced rate of 3.75% was introduced as a relief measure due to the COVID-19 pandemic.

No surcharge, education cess, or health and education cess shall be added to these rates. However, if the recipient does not furnish their PAN to the payer, the rate of TDS will be 20% or the applicable rate, whichever is higher.

If one is liable to deduct TDS on insurance commission under Section 194D, they need to adhere to the following procedure and timeline:

• TDS must be deducted at the applicable rate on the amount of insurance commission paid or credited to the recipient in a month.

• The TDS amount must be deposited to the government by the 7th day of the next month. For instance, if TDS is deducted in January, it must be deposited by 7th February.

• Challan ITNS 281 must be used to make the payment online or offline, including relevant details like PAN, TAN, assessment year, and nature of the payment.

• TDS return must be filed in Form 26Q every quarter, with due dates being 31st July, 31st October, 31st January, and 31st May for the first, second, third, and fourth quarters, respectively.

• The TDS certificate in Form 16A must be issued to the recipient within 15 days from the TDS return filing due date. For example, for the first quarter, the TDS certificate must be issued by 15th August.

• Failure to deduct, deposit, or file TDS on the insurance commission may result in penalties and interest. Here are the details of the consequences:

• Interest at 1% per month or part of a month for non-deduction of tax from the date on which tax was deductible till the deduction date.

• A fine of ₹200 per day for late filing of TDS return till the amount of penalty equals the amount of tax.

• Penalty of ₹10,000 to ₹1,00,000 for incorrect filing of TDS return

• A penalty equal to the amount of tax for failure to issue a TDS certificate.

Section 194D TDS of the Income Tax Act specifies the rules for TDS on insurance commissions or any other remuneration paid to agents or brokers for insurance-related activities.

It helps individuals who are involved in the insurance business to understand their tax responsibilities, such as how much to deduct, when to deposit, and how to file TDS returns. By following these rules, they can avoid any legal consequences and uphold ethical standards in the insurance industry.

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