Introduction
Section 194D of the Income Tax Act, of 1961 is a provision that deals with the deduction of tax at source (TDS) on insurance commission payments. In this article, we will take a closer look at the provision and understand the implication for taxpayers.
Applicability of Section 194D
The provision of Section 194D applies to a resident any income by way of:
- Remuneration, or
- Reward, or
- Commission, or
- Any other way
The payment received is for:
- Soliciting insurance business
- Procuring insurance business
- Business relating to continuance, renewal, or revival of policies of insurance
Rate of TDS
One is required to deduct TDS at the rate of:
- At the rate of 5% – The recipient is a resident other than a domestic company
- At the rate of 10% – The recipient is a domestic company
- At the rate of 20% – If PAN is not furnished by the deductor
Time of deducting TDS under Section 194D of the Income Tax Act, 1961
In case of payment made to the person, such person is required to deduct TDS when-
- Such sum is credited of such sum to the account of the payee; or
- Payment is made to the payee in cash or by way of issue of cheque/ draft/ any other mode.
Whichever event takes place earlier.
Threshold Limit under Section 194D
The deductor would be liable to deduct TDS under section 194D only if the aggregate amount of income credited or paid exceeds INR 15,000. In other words, the exemption limit specified is INR 15,000 and TDS would be deductible only above that amount.
Provision of Lower / NIL TDS deduction
The payee can, by filing an application in Form No. 13, request the Assessing Officer for a lower TDS deduction or NIL / no TDS deduction. Thus, if the payee receives the appropriate certificate from the Assessing Officer, the deductor would deduct TDS at a lower rate or NIL rate. Section 206AA(4) mandates that the application must contain the Permanent Account Number (PAN) of the applicant for the grant of a certificate for lower/NIL deduction.
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Circular by CBDT
The Income Tax Act does not allow adjustments for excess commission paid or credited, and TDS must be deducted for the full amount of commission credited. – Circular No. 277/ 1980
Reinsurance is not subject to TDS under Section 194D
The commission received by the reinsurance company from the business will not be subject to TDS under Section 194D of the Income Tax Act, 1961 as it is not for procurement of insurance business. (Case: CIT v. TATA AIG General Insurance Co. Ltd.)
Conclusion
Section 194D of the Income Tax Act, of 1961 deals with the deduction of tax at source (TDS) on insurance commissions. The rate of deduction under Section 194D is either 5% or 10% for income by way of remuneration, reward, commission, or otherwise.
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