TDS on insurance payouts (Section 194DA)

What is TDS on insurance payouts?

TDS on insurance payouts is the income tax a life insurer deducts at source when it pays out money under a policy that is not tax-free. Under section 194DA of the Income-tax Act, 1961, an insurer paying a resident any sum under a life insurance policy, including bonus, that is not exempt under section 10(10D) must deduct tax on the income part of that payment. The deduction is a prepayment of the recipient's tax, not an extra tax: the recipient claims credit for it in the return.

As of October 2026, the Income-tax Act, 2025 applies from 1 April 2026. The same obligation now sits in section 393(1) of the new Act, which brings all TDS provisions into one section with a table of payments. The rate and threshold carried over.

How section 194DA works

The rate cut from 5% to 2% came from the Finance (No. 2) Act, 2024, as part of a wider simplification of TDS rates. A recipient whose total income is below the taxable limit can give the insurer a declaration for no deduction where the law allows it (Forms 15G and 15H under the 1961 rules; tax software providers point to a single Form 121 under the new rules).

When does TDS apply on an insurance payout?

TDS under this provision is triggered mainly by:

• Non-ULIP policies issued on or after 1 April 2023 where the annual premium across such policies is above ₹5 lakh, on maturity or surrender.
• ULIPs issued on or after 1 February 2021 where the annual premium across such ULIPs is above ₹2.5 lakh.
• Any policy whose premium exceeded the sum assured ratio (10% for policies issued from 1 April 2012, 20% for 2003 to 2012).
• Keyman insurance payouts, which are never exempt under 10(10D).

Example

A customer receives ₹12 lakh on maturity of a non-linked policy that fails the ₹5 lakh test. Total premiums paid were ₹10 lakh. The income part is ₹2 lakh, and TDS at 2% is ₹4,000. The customer pays tax on the ₹2 lakh at their slab rate and claims the ₹4,000 as credit.

TDS on insurance commission (section 194D)

Distributors meet a related rule from the other side. Section 194D of the 1961 Act requires insurers to deduct TDS on commission paid to agents and other intermediaries. For individuals and other non-company recipients the rate fell from 5% to 2% from 1 April 2025, and the annual threshold rose from ₹15,000 to ₹20,000 from the same date. This provision also moved into section 393(1) of the 2025 Act from 1 April 2026.

What TDS on insurance payouts means for distribution

• Set expectations before maturity. A customer expecting a tax-free maturity who finds a TDS entry will call the agent first. Advisers should flag in advance which policies in a customer's portfolio are taxable, especially high-premium savings plans sold after April 2023.
• Death claims are not touched. Families receiving a death claim do not face TDS on it. Claim teams and agents can state this plainly.
• PAN and KYC must be current. Missing or invalid PAN leads to a higher deduction. Updating PAN and KYC well before maturity avoids it.
• Agents' own TDS changed. The 194D cut to 2% improves agents' monthly cash flow, though the tax liability is the same. Agents should still reconcile commission TDS against Form 26AS each year.
• Use the right references in letters. Payout letters and TDS certificates for payments from 1 April 2026 should refer to section 393 of the Income-tax Act, 2025.