TDS on non exempt portion of life insurance pay-out on net basis.

Under section 194DA of the Act, a person is obliged to deduct tax at source, if it pays any sum to a resident under a life insurance policy, which is not exempt under sub-section (10D) of section 10. The present requirement is to deduct tax at the rate of one per cent. of such sum at the time of payment. Several concerns have been expressed that deducting tax on gross amount creates difficulties to an assesse who otherwise has to pay tax on net income (i.e after deducting the amount of insurance premium paid by him from the total sum received). From the point of views of tax administration as well, it is preferable to deduct tax on net income so that the income as per TDS return of the deductor can be matched automatically with the return of income filed by the assessee. The person who is paying a sum to a resident under a life insurance policy is aware of the amount of insurance premium paid by the assessee. Hence, it is proposed to provide for tax deduction at source at the rate of five per cent.  on income component of the sum paid by the person.

This amendment shall be effective from 1st September, 2019.

[Clause 44]

 

 

 

TDS on life insurance income: withholding will target the income component to align taxable reporting and reconciliation. The amendment requires withholding tax to be deducted on the income component of non-exempt life insurance payouts rather than on the gross payout, to facilitate automatic matching of deductor TDS returns with recipients' tax returns because the payer can ascertain the premium paid by the policyholder, and specifies a commencement date for the change.