For resident life-insurance payouts made during 1 April 2025 to 31 March 2026, section 194DA applies a 2% deduction to the income comprised in a non-exempt payout. Its ₹1 lakh threshold tests the payment or aggregate payments to the payee during the financial year; it is not a ₹1 lakh exemption for the income component. A payment aggregate below ₹1 lakh escapes this deduction, while exactly ₹1 lakh does not escape through that proviso. See the applicable 2025 text of section 194DA.
Fix the period before reviewing the certificate
This is a historical FY 2025–26 reconciliation guide, useful when reviewing insurer certificates and the corresponding return. It does not apply the legacy section number mechanically to fresh 2026–27 transactions. The Income-tax Act, 2025 has a corresponding resident-payout entry in section 393(1), Table serial 8(i), which specifies 2% on the income comprised in the sum and excludes amounts covered by Schedule II, Table serial 2. Its general timing and threshold wording must be read independently. The Finance Act, 2026, sections 2 and 3 separately address the legacy assessment year and the new tax year. Recheck the current Act and rules for a new payout, rather than copying this year-specific worksheet.
Separate three decisions
First establish whether the particular sum is excluded under section 10(10D) for the period. Policy issue date, policy type, premium history and the nature of the event may matter. This article assumes that exemption analysis has already been completed; a maturity, surrender or death label alone is not a substitute for it. Keep the insurer’s policy-specific conclusion and supporting documents.
Next total the relevant payments by that payer to the resident payee during FY 2025–26. Then identify the supported income component and apply the ordinary 2% rate. Section 194DA requires deduction at payment. It does not direct a 2% charge on the entire maturity value merely because the payment threshold is crossed. The statutory rate reduction to 2% took effect on 1 October 2024 and therefore applies throughout the period considered here.
Build the return reconciliation
Use separate columns for policy reference, gross payment, payment date, exempt/non-exempt conclusion, insurer-supported income component, applicable deduction, actual deduction and certificate reference. Do not reconstruct taxable income by subtracting an unverified lifetime-premium total: the underlying charging provisions and premium-deduction history need a separate analysis. The examples deliberately supply a verified income component. They assume an ordinary resident case with valid PAN, no special higher-rate consequence, no valid non-deduction declaration and no special direction affecting the result.
TDS is a collection mechanism, not the policyholder’s final tax rate. Reconcile credit against the certificate and tax-credit record, and compute the return liability under the applicable law. A below-threshold payment can still contain taxable income. If the insurer has deducted on gross proceeds or used an incorrect income figure, request a documented explanation and correction; do not solve the mismatch by excluding taxable income from the return.
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Gross proceeds exceed the threshold
An insurer pays ₹6,00,000 during FY 2025–26. Exemption has been ruled out and the supported income component is ₹1,40,000. Ordinary TDS is ₹1,40,000 × 2% = ₹2,800; cash after this deduction is ₹5,97,200. Deducting 2% of the gross would produce ₹12,000, an excess of ₹9,200 over this working.
Illustrative example 2: Exactly ₹1 lakh
A single non-exempt payment is ₹1,00,000, with verified income of ₹18,000. The legacy proviso only excludes an aggregate less than ₹1,00,000. TDS is therefore ₹18,000 × 2% = ₹360, leaving ₹99,640. This illustration is expressly for FY 2025–26, not a conclusion about a later Act’s threshold wording.
Illustrative example 3: Below threshold still requires an income review
A resident receives the only relevant payment of ₹99,000, including supported income of ₹21,000. The payment total is ₹1,000 below the section 194DA threshold, so TDS under this section is nil. The ₹21,000 income figure must nevertheless enter the separate taxability review; no-deduction treatment does not create an exemption.
Illustrative example 4: Two payments cross the annual threshold
The same insurer makes non-exempt payments of ₹60,000 and ₹50,000 to one payee, with supported income components of ₹10,000 and ₹8,000. Annual payments are ₹1,10,000 and income is ₹18,000. Aggregate ordinary deduction is ₹360. If nothing was deducted on the first payment and the full adjustment is made on the second, its cash settlement is ₹49,640. Reconcile the payer’s actual deduction trail rather than treating each payment as a fresh ₹1 lakh limit.
Illustrative example 5: Exempt proceeds are a separate decision
A ₹4,00,000 payment is fully established as outside section 194DA because it is not includible under section 10(10D). Deduction under this provision is ₹0 despite the gross payment exceeding ₹1 lakh by ₹3,00,000. The exemption conclusion, not the size of the payment, controls this result.
Illustrative example 6: Credit is not final tax
For a ₹8,00,000 non-exempt payout with supported income of ₹2,50,000, ordinary TDS is ₹5,000 and cash is ₹7,95,000. Assume a separate, completed return computation establishes ₹72,000 total tax and ₹60,000 other eligible tax credits. Residual tax before this policy credit is ₹12,000; after the ₹5,000 credit it is ₹7,000. The assumed ₹72,000 is an input, not a tax-rate calculation or a claim about this policy’s final tax.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Lock the period | Payment-date schedule confirming FY 2025–26 and the relevant return period. |
| 2 | Confirm residence | Payee residence analysis; non-resident payments require a different review. |
| 3 | Identify the policy and event | Policy document, issue date, insurer settlement statement and event evidence. |
| 4 | Resolve exemption first | Written section 10(10D) conclusion supported by relevant policy facts. |
| 5 | Aggregate relevant payments | Same-payer/payee annual ledger without resetting the threshold per instalment. |
| 6 | Support the income component | Insurer working and underlying tax computation, not an assumed gross base. |
| 7 | Check ordinary-rate assumptions | PAN, declarations and any special instruction reviewed separately. |
| 8 | Recalculate deduction | 2% worksheet on the supported income component for covered payments. |
| 9 | Match the credit trail | Certificate, tax-credit record, bank receipt and insurer correction correspondence. |
| 10 | Complete the return review | Taxability computation and credit claim, with a fresh-law check for later payouts. |
Sixteen practitioner FAQs
1. Does this guide cover payouts in October 2026?
No. Its worked tax deductions concern FY 2025–26. Fresh 2026–27 transactions require the Income-tax Act, 2025 entry and applicable rules.
2. Is the rate 2% of maturity proceeds?
For the ordinary covered legacy case, it is 2% of the income comprised in the payout, not automatically gross proceeds.
3. What does the ₹1 lakh test measure?
The relevant payment or aggregate payments to the payee during the financial year under the legacy provision.
4. Is exactly ₹1 lakh excluded in FY 2025–26?
No. The section 194DA proviso uses less than ₹1 lakh, so equality does not qualify for that exclusion.
5. Does a ₹99,000 payout become tax-free?
No. The deduction threshold does not decide whether its income is taxable.
6. Can each instalment use a separate threshold?
No. Review the annual aggregate for the payer and payee; splitting payments does not erase aggregation.
7. Are all life-insurance receipts non-exempt?
No. Establish the section 10(10D) treatment from the actual policy facts before applying this provision.
8. Does the inclusion of bonus change the approach?
The statutory description includes allocated bonus. It still requires the exemption and income-component analysis.
9. Is surrender automatically taxable?
The label alone is insufficient. Examine policy terms and the applicable exemption and charging provisions.
10. Can premiums always be deducted from gross receipts mechanically?
No. The correct income calculation needs supporting tax facts, including treatment of premiums; use a verified policy-specific working.
11. When did the legacy ordinary rate become 2%?
The applicable statutory text records the reduction with effect from 1 October 2024, before FY 2025–26 began.
12. When is deduction triggered under section 194DA?
At payment under that section’s wording. Do not substitute a different timing rule from a later Act.
13. Does valid PAN settle every rate issue?
No. It is one assumption. Review any declaration or other special provision affecting deduction separately.
14. Does this cover non-resident policyholders?
No. The resident section cannot be applied to a non-resident merely because the insurer is Indian.
15. How should excess deduction be handled?
Seek the insurer’s basis and correction where appropriate, reconcile credit records, and compute the return under the applicable law.
16. Why mention section 393 at all?
To prevent reuse of a legacy worksheet for a new tax year. The corresponding entry must be read in its own framework.
Conclusion
Reconcile resident life-insurance payouts for FY 2025–26 using the ₹1 lakh payment threshold and 2% income-component deduction, with a separate 2026–27 transition check.