Is TDS Applicable on Insurance Expenses?

Tax Deduction at Source (TDS) is a system where the payer deducts tax on specified payments at the time of credit or payment. This acts as a prepaid tax mechanism for the government. TDS applies to various expense categories, including insurance premiums in certain cases.

This comprehensive guide will cover:

• What types of insurance attract TDS
• TDS rates on different insurance products
• Exclusions from TDS on insurance
• How TDS is calculated on premiums
• Who is responsible for deducting TDS on insurance
• When does the TDS need to be deposited
• How to claim TDS credit and file returns
• Penalties for non-compliance

Understanding the TDS requirements can help you stay compliant, avoid penalties, and claim tax credits on your insurance expenses.

What Types of Insurance Attract TDS?

The main categories of insurance policies that are subject to TDS are:

• Life insurance – Includes term plans, endowment policies, ULIPs, annuities, etc.

• Health insurance – Applies to most health plans, including individual policies, family floater plans, and group medical cover through an employer.

• General insurance – Certain general covers like fire insurance on assets above a threshold limit invite TDS.

So TDS applies to life, health, and some general insurance policies. Other major segments like motor insurance, travel cover, home insurance, etc. do not attract TDS.

TDS Rates on Different Insurance Products

The TDS rate differs based on the type of insurance policy:

• Life insurance – Attracts 1% TDS on premiums paid above ₹1 lakh per year.

• Health insurance – Subject to 5% TDS if the premium is over ₹50,000 in a year.

• General insurance – Imposes 10% TDS on fire or marine policy premiums exceeding ₹10,000 a year.

Here is a summary of the TDS rates on insurance premiums:

These thresholds consider the total premium paid, regardless of whether you pay yearly, half-yearly, quarterly, or monthly.

Exclusions from TDS on Insurance

Certain insurance plans are exempt from TDS even if the premium crosses the threshold.

Life Insurance Exclusions

TDS does not apply if:

• Sum assured is 10 times (or more) the premium amount

• Policy term is under 10 years

• Insured person is below 60 years of age

• Premium is paid entirely from funds in an NPS account

So endowment plans, ULIPs, etc. that meet these criteria will not face TDS.

Health Insurance Exclusions

The 5% TDS on health plans does not apply when:

• Premium is paid by an employer on policies covering employees and their families

• Policyholder is a Resident Senior Citizen (over 60 years old)

So health plans bought by senior citizens or group health covers paid by an employer are exempt. But individual policies do attract TDS once the ₹50,000 limit is crossed.

General Insurance Exclusions

No TDS will be applicable on general insurance covers like:

• Motor insurance

• Personal accident

• Travel policies

• Home insurance

• Cyber or professional indemnity

So TDS applies only to fire and marine policies exceeding ₹10,000 in premium per year.

How is TDS Calculated on Insurance Premiums?

If an insurance policy you hold falls under the TDS ambit, here is how the calculation is done:

Step 1: Check the total premium paid in a financial year

Step 2: Deduct any refunds received on cancellations

Step 3: Consider only the net premium amount

Step 4: Apply the relevant TDS rate (1% for life, 5% for health, 10% for fire/marine)

Step 5: Only deduct TDS if the amount calculated exceeds ₹2,500

Step 6: Round off the TDS to the nearest multiple of ₹10

Let’s take an example of a ₹75,000 health insurance premium.

• Net premium after refunds is ₹75,000
• TDS at 5% of ₹75,000 is ₹3,750
• This exceeds the ₹2,500 minimum
• So the final TDS will be ₹3,750 (rounded off from ₹3,740)

The ₹2,500 exemption ensures there is no TDS deduction if it is an insignificant amount.

Who Is Responsible for Deducting TDS on Insurance?

The responsibility for deducting TDS at the time of premium payment and depositing it with the income tax department lies with the insurer providing the policy.

So when you pay the insurer either directly or through an intermediary like an agent or website, it is the insurance company’s duty to:

• Determine if TDS applies
• Deduct appropriate TDS if premium exceeds exemption limit
• Deposit the TDS with the IT department
• Provide a TDS certificate to the policyholder

As an individual or business buying insurance, you only need to pay the total invoiced premium amount. The insurer will take care of deducting TDS if applicable before depositing the balance premium.

When Does the TDS on Insurance Need to be Deposited?

The due dates for insurers to deposit the deducted TDS with the income tax department are:

• Quarter 1 (April to June) – July 15
• Quarter 2 (July to September) – October 15
• Quarter 3 (October to December) – January 15
• Quarter 4 (January to March) – June 15

So insurers need to collect and pool TDS deductions from the quarter and submit the amount to the IT department within 45 days after quarter-end. As a policyholder, you only need to ensure the total invoiced premium is paid on time.

How to Claim TDS Credit on Insurance Premiums

If TDS is deducted from your insurance premiums, you can claim credit for this when filing your income tax returns. Here is the process:

Step 1: Collect Form 16B from the insurance company

Step 2: This certificate will have details of TDS deducted and deposited with your PAN

Step 3: Mention the TDS credit in your tax returns under the ‘TDS and TCS’ section

Step 4: The TDS amount will be adjusted against your total tax liability for the year

Step 5: You only need to pay any additional tax if your net liability exceeds the TDS credits

So the tax deducted upfront will come as a benefit when you file returns, reducing your overall tax outgo.

How Should Insurers File TDS Returns?

As per IT guidelines, insurers responsible for deducting TDS on premiums need to file quarterly TDS returns in Form 26Q. Key steps include:

• Consolidate TDS deducted across all eligible policies in the quarter

• Categorize deductions under section 194DA for life insurance and section 194D for general and health insurance

• Submit online Form 26Q on the TRACES portal by the due date

• Issue Form 16B to each policyholder with details of TDS deposited

• Rectify any defaults or mismatches in TDS returns for the quarter

Accurate and timely filing of TDS returns is vital for insurers to comply with regulations.

What are the Penalties for Non-Compliance?

If insurers fail to appropriately deduct or deposit TDS on insurance premiums, it can attract penalties under income tax rules. Two key consequences include:

Penalty for non-deduction: Up to the amount of TDS default will be levied as penalty. For instance, if ₹5,000 TDS should have been deducted but the insurer failed to do so, they will need to pay ₹5,000 penalty.

Interest for late payment: 1.5% interest per month is charged on late TDS deposits. If the insurer was required to deposit ₹10,000 TDS by July 15 but deposited it on August 20, interest will apply for over a month’s delay.

These penalties highlight the importance for insurers to have robust TDS assessment, deduction, and filing processes.

Conclusion

• TDS applies on most life and health insurance policies if premiums exceed the threshold exemptions
• General insurance covers like fire and marine also attract TDS beyond a specified limit
• Insurers are responsible for deducting and depositing the TDS based on income tax guidelines
• As a policyholder, you