Section 194D - TDS on Insurance Commission

Introduction

The insurance sector in India relies heavily on its vast network of agents. Whether you are a solo advisor selling life insurance policies door-to-door or a large corporate agency managing corporate health plans, the revenue model is the same. You sell a policy, and the insurance company pays you a commission.

For many agents, this commission is their primary source of livelihood. However, when the payment finally hits your bank account, it is often less than what you calculated. The reason is usually TDS, or Tax Deducted at Source, under Section 194D of the Income Tax Act.

While seeing a chunk of your earnings disappear into taxes is never pleasant, understanding why it happens can actually help you save money. Section 194D is not just about tax collection. It is part of your financial footprint. In this guide, we will break down exactly how this section works, the threshold limits for 2025, and most importantly, how you can claim this money back when you file your returns.

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Table of Contents

1. What is Section 194D?
2. Who is Responsible for Deducting TDS?
3. Rate of TDS Under Section 194D
4. Threshold Limit: When is TDS Deducted?
5. Time of Deduction
6. Exemptions: How to Avoid TDS on Commission
7. Difference Between Section 194D and 194DA
8. Consequences of Non-Deduction for Insurers
9. How Agents Can Claim TDS Credit
10. FAQs

What is Section 194D?

Section 194D specifically covers the deduction of tax at source on insurance commissions.

According to the Income Tax Act, any person authorized to pay a remuneration or reward (typically an insurance company) to a resident for soliciting or procuring insurance business must deduct tax before making the payment. This applies to all forms of insurance business, including Life Insurance, General Insurance (Health, Car, Home), and Re-insurance.

Ideally, this section targets the income of agents. Since the commission is treated as "income" for the agent, the government wants to track this income at the source to prevent tax evasion.

Who is Responsible for Deducting TDS?

The responsibility to deduct tax lies solely with the entity making the payment. In 99% of cases, this is the Insurance Company (the insurer).

It does not matter if the commission is paid to an individual agent, a partnership firm, or a corporate agency. If the payment is categorized as a commission for bringing in insurance business, the payer must deduct TDS.

Rate of TDS Under Section 194D

The rate of tax deduction depends on the status of the receiver (the agent). It is not a flat rate for everyone.

1. For Individual Agents and HUFs

If the payee is an individual or a Hindu Undivided Family (HUF), the TDS rate is 5%.

Example: If an agent earns a commission of ₹1,00,000, the insurance company will deduct ₹5,000 and pay the remaining ₹95,000.

2. For Domestic Companies

If the payee is a domestic company (e.g., a corporate insurance brokerage), the TDS rate is 10%.

3. If PAN is Not Furnished

This is a critical compliance point. If the agent fails to provide a valid PAN card to the insurance company, the TDS rate jumps straight to 20% under Section 206AA. This can severely impact cash flow, so keeping your KYC updated with the insurer is vital.

Threshold Limit: When is TDS Deducted?

TDS is not deducted on every single rupee from the very first policy you sell. There is a specific monetary ceiling or threshold limit.

The Limit: ₹15,000

TDS under Section 194D is deducted only if the aggregate amount of commission paid or credited to the agent during the financial year exceeds ₹15,000.

• Scenario A: You sell one policy and earn a commission of ₹8,000. No TDS is deducted.
• Scenario B: Later in the year, you sell another policy and earn ₹8,000 more. Your total income is now ₹16,000. Since this crosses the ₹15,000 limit, the insurance company will deduct TDS on the entire ₹16,000 (not just the extra ₹1,000) at the time of the second payment.

Time of Deduction

The insurance company cannot delay the deduction. The liability to deduct tax arises at the earliest of the following two dates:

1. At the time of credit: When the commission amount is credited to the agent's account in the company's books.
2. At the time of payment: When the actual payment is made via cheque, draft, or online transfer.

Even if the company has not paid you the cash yet, but has finalized your commission statement in their software (credited your account), they are liable to deduct the tax.

Exemptions: How to Avoid TDS on Commission

If your total income is low, you might feel that a 5% deduction is unfair because you might not even fall into the taxable bracket. The government provides a way out.

Form 15G and 15H

If you are an individual agent and your estimated total income for the year is below the basic exemption limit (₹2.5 Lakh for Old Regime or ₹3 Lakh for New Regime), you can submit a self-declaration.

• Form 15G: For individuals under 60 years.
• Form 15H: For senior citizens (60 years and above).

Once you submit this form to the insurance company, they will pay your commission without deducting any TDS.

Certificate under Form 13

If you are not eligible for Form 15G but feel the 5% rate is too high for your profit margins, you can apply to the Assessing Officer (AO) for a "Lower Deduction Certificate" using Form 13. If the AO approves, they will issue a certificate authorizing the insurer to deduct tax at a lower rate (e.g., 1% or 2%).

Difference Between Section 194D and 194DA

These two sections often confuse taxpayers because they look similar.

• Section 194D: Applies to Commission income earned by the agent. (Company pays Agent).
• Section 194DA: Applies to Maturity Proceeds of a life insurance policy paid to the policyholder. (Company pays Policyholder).

If you are a policyholder receiving a maturity amount, Section 194D does not apply to you. You are governed by Section 194DA (TDS at 5% on income part if payout > ₹1 Lakh).

Consequences of Non-Deduction for Insurers

For insurance companies, compliance is strict. If an insurer fails to deduct TDS or deducts it but fails to deposit it with the government:

1. Disallowance of Expense: Under Section 40(a)(ia), 30% of the commission expense claimed by the company will be disallowed. This increases the company's taxable income.
2. Interest: They must pay interest at 1% or 1.5% per month on the delayed amount.
3. Penalty: The Assessing Officer can levy a penalty equal to the amount of tax not deducted.

How Agents Can Claim TDS Credit

The TDS deducted is not a sunk cost. It is essentially an advance tax paid on your behalf.

1. Check Form 26AS: Log in to the Income Tax portal and check your Form 26AS. The TDS deducted by the insurance company should appear there.
2. Get Form 16A: Ask your insurance company for Form 16A. This is the TDS certificate issued quarterly.
3. File ITR: When you file your Income Tax Return (ITR), this TDS amount will be adjusted against your total tax liability.

If your total tax liability is ₹10,000 and the TDS deducted is ₹12,000, the government will refund the excess ₹2,000 to your bank account.