What Is Section 194D of the Income Tax Act?
Section 194D is a rule that makes the person paying insurance commission—like an insurance company—deduct tax before giving the payment to the agent. This is called TDS (Tax Deducted at Source). It applies when the commission is paid for getting or renewing insurance business. The aim is to collect tax systematically and ensure agents pay income tax on their earnings properly.
Who Is Covered Under Section 194D?
- Payers liable to deduct TDS: Insurance companies or anyone paying commission for insurance business.
- Recipients subject to TDS: Agents, brokers, or individuals (including HUFs, companies) who receive insurance commission. It applies only if the recipient is a resident; payments to non-residents fall under Section 195.
What Is the TDS Rate Under Section 194D?
- Individuals or other residents (not companies): Typically 5%, though temporarily recommended to lower to 2% from April 1, 2025.
- Domestic companies:10%.
- No PAN received: TDS is at 20%.
- Threshold limit: No TDS if total commission paid or credited in a financial year is below ₹20,000 (increased from ₹15,000 from April 1, 2025).
- No surcharge or cess is added to these TDS rates.
When Is TDS Deducted on Insurance Commission?
TDS must be deducted whichever happens earlier:
- At the time of credit of commission to the agent’s account, or
- At the time of payment—whether in cash, check, or any other mode.
What Are the Exemptions Under Section 194D?
- Commission amount does not exceed ₹20,000 in the financial year.
- Agent submits Form 15G or 15H (if applicable) declaring income is below the taxable limit.
- Agent obtains a certificate from the Assessing Officer (AO) under Section 197, allowing no TDS or lower TDS; requires providing PAN.
How Can Agents Claim TDS Deducted Under Section 194D?
- After TDS is deducted, agents receive Form 16A, the TDS certificate summarizing the commission and deducted tax.
- While filing their Income Tax Return (ITR), agents claim TDS as tax credit to reduce their tax liability.
Consequences of Non-Compliance with Section 194D
- Interest penalty (1% per month) if TDS is not deducted or deposited on time.
- Disallowance of expenditure if TDS is not deducted—payer may lose deduction in their tax computation.
- Additional penalties for late filing of TDS returns or issuing Form 16A.
- Serious non-compliance could lead to penal action or scrutiny from tax authorities.
Recent Budget 2025 Updates
- Threshold limit increased from ₹15,000 to ₹20,000 starting April 1, 2025.
- Suggested TDS rate for individuals was lowered to 2% in proposals.
Is the Reinsurance Commission Covered?
- No, TDS under Section 194D does not apply to reinsurance commissions.
Difference Between Agent Commission and Brokerage Commission
- Section 194D applies to insurance commission, not brokerage, which is covered under Section 194H.
Conclusion: Section 194D makes sure insurance agents pay tax on commissions through a TDS mechanism. The payers—like insurance companies—must deduct the correct rate and file it on time. Agents need the TDS certificate (Form 16A) to claim credit during tax filing. This helps keep the system fair and ensures taxes are tracked from source. Keeping tabs on thresholds and compliance rules is key to avoiding trouble.
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FAQs
What is Section 194D of the Income Tax Act?
It mandates TDS on insurance commission paid to agents and brokers for procuring or renewing insurance business.
Who must deduct TDS under Section 194D?
The insurer or person paying the commission to a resident agent or broker.
What is the current TDS rate under Section 194D?
5% for individuals, 10% for domestic companies, and 20% if PAN is not provided.
Is there any exemption threshold?
Yes, TDS applies only if total commission exceeds ₹20,000 in a financial year (from April 1, 2025).
When should TDS be deducted?
At the time of crediting commission to the agent’s account or payment—whichever is earlier.
Can agents avoid TDS?
Yes, by submitting Form 15G/15H (if eligible) or a certificate from AO under Section 197.
What if TDS isn't deducted?
The deductor faces interest, loss of expense deduction, and possible penalties.
What should agents do with Form 16A?
Use it to claim tax credit while filing their ITR.
Does Section 194D apply to non-residents?
No. Payments to non-residents are governed by Section 195.
Is Section 194D applicable for reinsurance commissions?
No, reinsurance commissions are not covered under Section 194D.
