Budget slashes TDS on life cover pay-outs, insurance commission 

Union Budget 2024-25 reduces TDS on life insurance policy payouts and commissions, aiming to boost liquidity and tax compliance.

Union Budget 2024-25 proposes to slash the rate at which tax will be deducted at source (TDS) on life insurance policy pay-outs, to policyholders, and insurance commission payable, to agents, from 5% to 2%.

The proposal to reduce TDS on life insurance policy cover, including on the sum by way of bonus, by amending Section 194DA of the Income tax Act will come into force from October 1, 2024, Budget documents accompanying Finance Minister Nirmala Sitharaman’s speech on Tuesday said.

Likewise, the Budget has proposed amendment to Section 194D, pertaining to TDS on payment of insurance commission. “Any person responsible for paying to a resident any income by way of remuneration or reward, whether by way of commission or otherwise, for soliciting or procuring insurance business (including business relating to the continuance, renewal or revival of policies of insurance),” will deduct TDS at the rate of 2%. The amendment will take effect from April 2025, according to the documents.

For the insurance sector, Tuesday’s Budget proposals were a mixed bag with the Finance Minister also announcing a measure to preventing misuse of deductions of expenses claimed by life insurers.

The proposal comes amid instances where non-business expenses have been claimed by life insurance companies. The Budget has proposed an amendment providing any expenditure not admissible under the provisions of Section 37 in computing profits and gains to be included to profits and gains of the life insurance business. The amendment will take effect from April 1, 2025 and accordingly apply from assessment year 2025-2026 onwards.

Welcoming the Budget proposals aimed at enhancing employment, skill development, MSMEs and the welfare of the middle class, MD and CEO of IndiaFirst Life Rushabh Gandhi said “the introduction of a clause pertaining to non-deductible expenses in Section 37 for life insurance companies may lead to tax litigation.”

Likewise, he said the Budget proposal to increase Capital Gains Tax is expected to impact tax liabilities for ULIP policyholders. However, ULIP holders purchasing policies with premium of less than ₹2.5 lakh per annum can continue to avail benefits under Section 10 (10D) and are not liable to pay any tax on maturity.