A Complete Guide to Insurance Commission Taxability

• Insurance agents earn a commission on insurance policies that they sell. The insurance commission taxability is different from salary income.
• TDS is deducted from the commission at 10% for a company and 5% for an individual. The rate increases to 20% if PAN is not submitted.
• TDS is not deducted in specified instances.
• Insurance agents should file their returns in ITR-3.

Insurance agents are licensed intermediaries who sell insurance policies to individuals or businesses on behalf of insurance companies. Unlike salaried employees, these insurance agents earn primarily through commissions based on the number of insurance policies they sell. The commission income should not be conflated with salary as the tax treatments for commission income differ under the Income Tax Act of 1961.

Tax Deduction at Source (TDS) on Insurance Commission Taxability of an Insurance Agent

TDS is deductible on the commission income of insurance agents as per Section 194D of the Income Tax Act, 1961.Some of the important aspects of the TDS deduction are as follows -

• For soliciting or procuring insurance business
• For business by way of renewal, revival, or continuation of policies

• The insurer deducts the TDS at the time of payment of the commission to an Indian Resident for the following purposes:
• The rate of TDS for the company is 10%, and that for a resident person other than a company is 5%. Surcharge or cess shall not apply to the above rates.
• TDS will not be deducted if the commission paid does not exceed ₹15,000 or if the total income of the insurance agent is less than ₹3,00,000, the basic exemption limit, in case the insurance agent is less than 60 years of age.
• If the amount of TDS is more than ₹50,000 in the previous two years, but the insurance agent has not filed income tax returns, the rate of TDS shall be two times the specified rate or 5%, whichever is higher.
• The TDS rate shall be 20% if the insurance agent does not quote their PAN.

Insurance agents typically do not qualify for presumptive taxation. Therefore, they must pay taxes per the normal provisions at slab rates based on their income brackets.The process for calculating the tax is as follows -

Deduction of Expenses

Insurance agents can get a deduction of their expenses concerning their insurance business, provided they maintain justifiable and proper records of the incurred expenses. However, without adequate records, an ad hoc deduction is available specifically for Life Insurance Corporation (LIC) agents.

Computing Income

Insurance agents can compute their income using tools provided by the income tax department. These tools help them determine their taxable income accurately based on their earnings and allowable deductions.The deduction of expenses incurred by him shall be available if he maintains proper and justifiable records relating to such expenses. Otherwise, an ad hoc deduction shall be available to agents of Life Insurance Corporation (LIC) as explained below. Also, an insurance agent’s income can be computed with the help of the tool made available by the income tax department.

Ad hoc Deduction for Life Insurance Corporation (LIC) Agents

Agents of LIC are eligible for an ad hoc deduction from their income even if they have not maintained proper and detailed records of their expenses if their gross commission income does not exceed ₹60,000.The actual expenses can be claimed if the agents maintain proper records of the expenses. The allowable Ad hoc deduction will be as follows:

• Separate commission amounts for the first-year and renewal commission are available, then a deduction of 50% of the first-year commission and 15 % of the renewal commission;
• If such separate figures are unavailable, then one-third of the gross commission.

In the above cases, the deduction will be subject to a maximum limit of ₹20,000.

Mr Ravi worked for 8 months in the financial year 2023-24 and earned a salary of ₹45,000 per month. Later, in December 2023, he started working as an insurance agent and earned a total commission in the financial year 2023-24 of ₹59,800. Out of ₹59,800, he earned ₹35,000 from new policies sold and the first year’s commissions and the remaining ₹24,800 from the renewal of LIC policies. Ravi has spent ₹5,000 in travelling and telephone expenses to secure these commissions. During his job, he also contributed ₹35,000 to the Employee Provident Fund (EPF) and deposited ₹60,000 to the Public Provident Fund (PPF).There are two instances in this case.

Instance 1: If Ravi maintains proper and justifiable records of the expenses

As Ravi maintains proper and justifiable records of the expenses, he can claim a deduction for the expenses he incurred.

Instance 2: If Ravi does not maintain proper and justifiable records of the expenses and separate amounts are available:

Hence, the total taxable income would be ₹59,800-₹20,000 = ₹39,800 However, if the separate amounts are not available, then it would be:

Hence, the total taxable income would be ₹59,800-₹19,733= ₹40,067 Note: No other expense is allowed to be deducted from this insurance commission. However, if the income of the LIC insurance agent exceeds ₹60,000 and he does not maintain proper records of the expenses, ad hoc deduction would not be available to them.

Considering the above case study, the total taxable income of Mr. Ravi can be computed as follows:

Also Read: Business Income Tax - How Income Tax Is Calculated on Business Income?

Insurance agents are required to file ITR-3 as applicable to them for filing commission income in ITR. Since they do not qualify for the presumptive taxation scheme, they cannot file ITR-4. The ITR for commission income requires the following information:

• General information and business details
• Income Tax Computation as per the Income Tax Act of 1961
• Balance sheet as of the year-end
• Profit or loss statement for the relevant financial year

The income tax return for commission income can be filed only after verification either by sending a physical copy of the signed ITR-V to CPC, Bangalore or by e-verifying through Aadhaar OTP and Electronic Verification Code (EVC) via net banking/bank account/demat account/ ATM.

If you are an insurance agent, understand how your commission income will be taxed to plan your taxes effectively. Use the right tax planning tools to save your tax outgo and enhance your investments.