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The fast-paced lifestyle, climate change, and inflation call for the need for protection from uncertain medical expenses. Insurance plays a vital role in hedging the people by providing financial support in medical emergencies. The pace of the insurance sector in India is unbeatable, and growing awareness indicates that the industry will reach US$222 billion by 2026.
Understand the insurance industry in India: From colonial legacy to global ambition: The Indian insurance sector
There are several aspects to consider in insurance, such as premium, duration, disease covered, clauses, etc. People usually find it difficult to handle so many factors, and thus they consider an insurance agent for a smooth process.
Insurance agents are the people who suggest the right policy as per the consumer’s need, budget and other factors. In return for this service, the commission is paid to them.
TDS is applied to the income earned from the insurance commission under section 194D of the Income Tax Act, 1961. Let us discover more about the taxation benefits for income from insurance commissions.
What is Section 194D of the Income Tax Act 1961?
Insurance agents receive commissions from the insurance companies in exchange for their customer services to clients. This commission is taxable under the head ‘income from other sources’. The insurance company pays this commission by cutting Tax Deducted at Source (TDS). As per section 194D, the insurance commission should be paid after the effect of TDS.
The Tax Deducted at Source (TDS) is deducted by the payer while crediting the commission to the agent’s account. The TDS is deducted from the composition of ‘basic pay+tax’. The recipient of this insurance commission would get a certificate mentioning the details of this deduction every quarter as follows:
| April to June | August 15 |
| July to September | November 15 |
| October to December | February 15 |
| January to March | June 15 |
Source: Income Tax Department
Know more about TDS: What is TDS? A complete overview of TDS in income tax.
Who will deduct the TDS?
As per this 194D TDS section, Insurance agents who are eligible for TDS should complete the following criteria:
- The insurance company or the person responsible for making payment of commission to agents.
- Any person authorised to collect premiums from insurance holders.
There are also some exceptions to these criteria. The following would be a few conditions for not deducting TDS:
- An agent with an aggregate insurance commission of less than ₹15000/- per annum.
- Agent who furnishes the form 15G and 15H. These are declaration forms stating that the person’s income is less than the limit prescribed.
- The agent has obtained a certificate from the Assessing Officer, which authorises not to deduct the TDS or make those deductions at a rate lower than the existing rates.
Are you confused between TDS and TCS? Read this: TDS vs TCS: Clearing the blur between these two indirect taxes.
Rates and thresholds
The limit prescribed by Section 194D of the Income Tax Act, 1961, is an insurance commission of ₹15000/- per annum. The rates for TDS deduction differ based on the country from which the company is hailing.
| Particulars | TDS rates |
| Individual residents | 5% |
| Domestic company | 10% |
| If a Permanent Account Number (PAN) is not available | 20% |
Source: Rates of TDS ICMAI
- The surcharge or any education cess should not be applied over the basic pay while calculating the tax and TDS.
- In case of failure to deduct the TDS while paying insurance commission, the company will have to pay an interest of 1% per month or 1% on the part of month from the date on which TDS was deductible to the date on which TDS is deducted.
- A fine of ₹200 per day is imposed if the deductor delays filing the TDS return.
- A fine equal to the tax amount is imposed for failure to issue the TDS certificate.
Bottomline
Many people from the working class look for any extra source of income, students look for part-time sources and even housewives these days look for jobs which would help them generate income from home. The work profile of an insurance agent is suitable for such people.
However, this agent should know how that person’s income is processed. The information regarding Section 194D of the Income Tax Act, 1961, is crucial for the TDS deductor (the insurance company) and the agents on whose income this TDS is applicable.
FAQ
The Income Tax Act 1961 prescribes the Tax Deducted at Sources norms for the income from the insurance commission received by the agents. This section emphasises the rates, eligibility and threshold for deducting TDS during the insurance commission payment. The threshold for TDS is ₹15,000/- and it is applicable at the rate of 5%. The recipient can also claim the credit for TDS against the annual tax payment.
At the maturity of the life insurance policy, the Tax Deducted at Source (TDS) is applicable only on the income part as per section 194DA of the Income Tax Act, 1961. This income part refers to the maturity income minus the premium paid by the policyholder. This TDS rate is 5% for individuals, and the threshold is ₹1,00,000. Moreover, it is not applicable if the amount is exempted under section 10(10D).
Section 194D of the Income Tax Act, 1961 applies tax deducted at source (TDS) on the income from the insurance commission. This commission is given to an authorised person, called an agent, by the company. However, section 194H of the Income Tax Act of 1961 deals with TDS on the income from insurance commissions. However, this commission is to the insurance broker, who receives a commission from the policyholder.
The insurance agent can be exempted in three ways from the TDS deduction under section 194D:
The agent has a commission income of less than 150000/- per annum.
The agent who has filed forms 15G and 15H declaring that the income is below the threshold limit.
The agent has received a certificate from the Assessing Officer indicating not to deduct TDS or to deduct lower than the normal limit.
Form 26 has information regarding the Tax Deducted at Source (TDS) or Tax Collected at Source (TCS) from the income of the tax-paying agent. The TDS on the insurance commission of an agent can be claimed by producing Form 26 against the annual return of the agent. Thus, it is a crucial document for claiming credit.