Deduction of TDS on Payment of PLI/RPLI Policies under Section 194DA of the IT Act, 1961

Deduction of TDS on Payment of PLI/RPLI Policies

Understanding the guidelines and implications of Tax Deducted at Source (TDS) on Postal Life Insurance (PLI) and Rural Postal Life Insurance (RPLI) policies is crucial for ensuring compliance with tax laws. This article provides detailed insights based on the Ministry of Communications’ directives on the deduction of TDS on PLI/RPLI payments.

Key Directives and Guidelines

1. Reference to Previous Instructions
   • A previous directive dated 22nd September 2023 highlighted the necessity for all Drawing and Disbursing Officers (DDOs) to deduct TDS on applicable PLI/RPLI payments under Section 194DA of the IT Act, 1961, and ensure timely payment to tax authorities.

1. Timely Deduction and Credit of TDS
   • The deducted TDS amount on PLI/RPLI policies must be credited under MH-0021-00-102-09-00-00 (GL Code-8002100150) on an interim basis until the provision is incorporated into the McCamish software.
2. Non-Compliance Issues
   • It has been observed that some Heads of Circles are not adhering to the guidelines, resulting in notices from tax authorities. Strict compliance with the guidelines issued in the letter dated 22nd September 2023 is reiterated.

Detailed Guidelines for TDS Deduction

1. Implications and Exemptions Under Section 194DA
   • Section 194DA mandates TDS on life insurance policy maturity payments, including bonus payments, except for sums exempted under clause 10(D) of Section 10. The applicable TDS rate is 5%.
2. Scenarios for TDS Applicability
   • If the premium paid during any year does not exceed 20% of the sum assured for policies purchased between April 1, 2003, and April 30, 2012, or 10% for policies purchased after April 30, 2012, no TDS is deducted. Policies covering severe disability under Section 80U or certain diseases under Section 80DDB have a 15% threshold for policies purchased on or after April 1, 2013.
3. Payment Threshold
   • TDS is applicable if the payment in a financial year exceeds ₹1 lakh. If the policy matures below this threshold or in the event of the policyholder’s death, no TDS is deducted.
4. TDS Rates
   • The standard TDS rate is 5%, increasing to 20% if the policyholder does not submit their PAN.

Examples

1. Policy Purchased Between April 1, 2003, and March 31, 2012
   • Scenario 1: No TDS is deducted if the annual premium is less than 20% of the sum assured.
   • Scenario 2: TDS is deducted at 5% if the annual premium exceeds 20%.
2. Policy Purchased After April 30, 2012
   • Scenario 1: TDS is deducted at 5% if the annual premium exceeds 10%.
   • Scenario 2: No TDS if the premium is less than 10%.
3. Policy for Disabled Individuals
   • TDS is not applicable if the annual premium is less than 15% for policies covering severe disabilities.

TDS Deduction Procedure

Given that the McCamish software used by the Department of Posts does not currently support automatic TDS deductions, a manual procedure has been established:

1. Non-TDS Deductible Policies:
   • Process payments as per existing rules without deducting TDS.
2. TDS Deductible Policies:
   • Deduct applicable TDS at 5% (or 20% if PAN is not provided).
   • Process payments through cheque or NEFT only.
   • Update the policy status in McCamish to “Paid” to avoid duplicate payments.

Practical Scenarios

To illustrate, let’s consider a few practical cases:

Scenario 1: Policy Issued Between April 1, 2003, and March 31, 2012

• Sum Assured: ₹10,00,000
• Policy Term: 9 years
• Monthly Premium: ₹9,980
• Annual Premium: ₹1,19,760
• Maturity Amount: ₹14,68,000
• Exemption: Premiums are less than 20% of the sum assured, hence exempt under section 10(10D).

Scenario 2: Policy Issued After April 30, 2012

• Sum Assured: ₹10,00,000
• Policy Term: 9 years
• Monthly Premium: ₹9,980
• Annual Premium: ₹1,19,760
• Maturity Amount: ₹14,68,000
• TDS Deduction: Premiums exceed 10% of the sum assured. TDS is ₹19,508 [(₹14,68,000 – ₹10,77,840) * 5%].

Compliance and Reporting

To ensure compliance:

• Maintain a register of policies on which TDS is deducted.
• Send a monthly consolidated report on TDS deductions to the Head of Accounts.

Conclusion

Adherence to the Ministry of Communications’ guidelines on TDS deductions for PLI/RPLI policies is imperative to avoid legal complications. By following these directives, Heads of Circles and DDOs can ensure compliance and prevent issues with tax authorities. For further details, refer to the comprehensive guidelines issued by the Directorate of Postal Life Insurance.