What is the TDS section 194D?

Hi everyone!

In my today’s session, I will let you know the TDS sections 194D

What is the TDS section 194D?

Section 194D is a part of the Income Tax Act in India, and it’s about TDS (Tax Deducted at Source) on insurance commission. If you pay someone a commission for their work related to insurance, you have to deduct a certain amount as TDS before giving them the full payment. Currently, the TDS rate for this is 5%. It’s basically a rule to ensure taxes are taken care of when there’s a commission involved in the insurance business.

Who is liable to deduct the TDS under section 194D?

Under Section 194D, the person or entity making the payment of insurance commission is liable to deduct TDS. So, if you’re an individual, a Hindu Undivided Family (HUF), or any other entity making a payment as commission or brokerage for the insurance business, you are responsible for deducting the applicable TDS before making the payment to the recipient. It’s your duty to ensure that the tax is deducted at the source and then deposited with the government.

Rate of TDS deduction under Section 194D

When it comes to paying commissions in the insurance world, Section 194D of the Income Tax Act says you need to take out a certain amount as tax (TDS) before giving out the payment. Now, how much tax are we talking about?

The Rate Breakdown:

It depends on two things:-

1. Who’s getting the money?

  • For regular folks (individuals or families), it’s 5% if they have a proper PAN card. If not, it’s 20%.
  • If it’s a company within India, they get 10% TDS with a valid PAN and 20% without.

2. Do they have a PAN card?

  • If they have a valid PAN, the lower rates from point 1 apply.
  • If there’s no PAN or it’s not valid, everyone gets a flat 20%, no matter who they are.

Remember:

  • These rules are for people and companies living in India. If they’re from another country, different rules (Section 195) apply.
  • If the payment is less than ₹15,000 in a year, you don’t have to worry about deducting any tax.

Example: Let’s say an insurance company is paying a commission of ₹30,000 to an individual agent who has a valid PAN. In this case, the TDS rate is 5%, so you deduct ₹1,500 as tax before handing over the remaining amount.

Penalty for late deduction

Two types of penalty have been imposed on section 194D

1. Interest on Late Payment:

  • If you’re late in giving the TDS money to the government after deducting it, you get a penalty.
  • The interest is 1.5% for each month or part of a month that you’re late.
  • This penalty sticks whether you eventually pay the TDS or not.

2. Penalty for Late Deduction:

  • If you forget to deduct TDS when you’re supposed to (at the time of payment or crediting it to the payee’s account, whichever happens first), there’s another penalty waiting for you under Section 221.
  • The penalty amount is a whopping 100% of the tax that should have been deducted in the first place.
  • But, there’s a cap: the penalty can’t be more than the income for which the tax should have been deducted.

In simple terms, be on time with your TDS payments, or you might end up with extra charges and penalties.

Thanks!

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