Understanding Section 194D of the Income Tax Act is essential for insurance agents and brokers in India. This provision governs how tax is deducted at source (TDS) on insurance commissions, ensuring all such payments are properly recorded and taxed.
Since its introduction in 1973, the TDS framework has undergone several changes. The latest update, announced in Union Budget 2024, proposes a significant cut in the TDS rate on insurance commissions—from 5% to 2%—effective April 1, 2025.
This change is expected to ease the tax burden on thousands of insurance intermediaries, provided they remain compliant with all related rules.
Key Highlights
- Applies to commissions for soliciting, renewing, or reviving insurance policies.
- Current TDS rate: 5% for individuals and 10% for domestic companies.
- Proposed rate cut to 2% for individuals from April 2025.
- Commissions up to ₹15,000 in a financial year are exempt.
- TDS must be deposited by the 7th of the following month.
- Non-furnishing of PAN attracts a higher TDS rate of 20%.
Why TDS Compliance Matters
Tax Deducted at Source is a critical mechanism for tax collection in India, covering payments like salaries, fees, and commissions. In the insurance sector, commissions often involve large sums, making compliance a must.
For individuals and Hindu Undivided Families (HUFs), the standard TDS rate on insurance commission is 5%; for domestic companies, it is 10%. Without a PAN, the rate rises sharply to 20%. Delayed payment of TDS can result in a penalty of 1% interest per month until cleared.
Section 194D: The Basics
Section 194D specifically addresses tax on commissions paid to insurance agents and brokers. Companies paying such commissions must deduct TDS if the annual payout exceeds ₹15,000. The deducted amount must be deposited with the government by the 7th of the next month, and Form 16A should be issued within 15 days of filing the quarterly TDS return.
In 2021, TDS rates were temporarily reduced to ease the financial strain caused by the COVID-19 pandemic. The upcoming 2025 rate cut aims to provide further relief and improve compliance clarity in the sector.
| Aspect | Details |
|---|---|
| TDS Rate – Domestic Companies | 10% |
| TDS Rate – Other Resident Persons | 5% |
| Exemption Limit | ₹15,000/year |
| Deposit Deadline | 7th of next month |
| Penalty – Late Filing | ₹200/day (capped at TDS amount) |
| Interest – Non-Deduction | 1% per month |
| Higher Rate – No PAN | 20% |
| Certificate Issuance Deadline | 15 days post TDS return due date |
When TDS is Deducted
TDS under Section 194D applies when the total commission in a financial year exceeds ₹15,000. The rate depends on the recipient’s status: 5% for individuals, 10% for companies, and 20% for those without a PAN.
Agents can submit Form 15G or Form 15H to avoid TDS if their income is below the taxable limit. Certain life insurance payouts—such as bonuses—are exempt depending on premium-to-sum assured ratios.
Payments Covered by Section 194D
The provision applies to:
- Commissions for new insurance policies.
- Renewals of existing policies.
- Remuneration related to both life and health insurance.
Quarterly TDS returns (Form 26Q) are due on July 31, October 31, January 31, and May 31. Form 16A certificates must be issued to recipients within 15 days of these deadlines.
Non-Compliance Can Be Costly
Failing to deduct or deposit TDS can result in:
- 1% interest per month on the undeducted amount.
- 1.5% interest per month on delayed deposits.
- A daily late-filing fee of ₹200 (up to the TDS amount).
- Penalties under Section 271C equal to the amount not deducted.
- In extreme cases, imprisonment for up to 7 years.
Taxpayers must maintain TDS records for at least six years to avoid disputes with authorities.
Bottom Line
For the insurance sector, understanding Section 194D is not just about avoiding penalties—it’s about ensuring smooth business operations. The upcoming TDS rate cut in April 2025 could provide significant relief, but only to those who stay compliant with the rules.
Being prompt with deductions, deposits, and documentation will help agents and companies alike maintain their reputation and financial health.