Apr 2611 min read

Section 194A of the Income Tax Act: TDS on Interest Other than Interest on Securities

Q: Q8. What is the rate of TDS under Section 194A?

When the payee provides the PAN, the TDS rate is 10%. For interest credited from May 14, 2020, to March 31, 2021, this rate was 7.5% as a government COVID-19 alleviation mechanism.

Updated: Oct 1

Section 194A of the Income Tax Act governs the deduction of Tax Deducted at Source (TDS) on interest income, excluding interest on securities. This section applies to interest payments from banks, cooperative societies, or other financial institutions to individuals, firms, or entities. TDS is applicable when interest income exceeds a specified threshold, ensuring that tax on such income is collected at the source. Understanding Section 194A is crucial for taxpayers earning interest and for payers who must comply with the TDS deduction rules.

This article explores the provisions, thresholds, exemptions, and filing requirements under Section 194A in detail, helping both payers and recipients of interest income to comply with their tax obligations.

What is Section 194A of the Income Tax Act?

The requirements regarding the TDS on interest rates other than those imposed on securities are commonly addressed by Section 194A. TDS is required to be withheld from interest paid on unsecured loans and other items, as per Section 194A. According to section 194A's rules, the tax must be subtracted from any interest paid to a resident. It is crucial to remember that if the interest is going to be paid to a non-resident, 194A TDS is not applicable.

Features of Section 194A

Interest on fixed deposits, recurring deposits, loans, and advances of both secured (e.g., against collateral) and unsecured kinds are exempt from TDS.

The TDS regulations also take into account the deductible interest against securities; nonetheless, Section 193 of the Income Tax Act contains the relevant provisions.

Only citizens of India are covered by this section. Hence, Non-Resident Indians are exempt from all of section 194A's requirements.

TDS deductions are also applicable to payments made to non-resident individuals (NRIs), however, Section 195 of the Income Tax Act addresses this aspect.

An entity or an individual who is to be assessed for such interest income may provide a copy of Form 15G (for resident Indians under 60 and Hindu Undivided Families) or Form 15H (for resident Indians who are turning 60 during the Financial Year or who have already turned 60) to the payer of the interest if they are not required to pay taxes because their incomes do not exceed the minimum income slab, which is taxable under government regulations.

Who Deducts TDS under Section 194A?

Under section 194A, the following payers/deductors are obliged to deduct TDS:

An individual or a Hindu Undivided Family, provided that their business or profession generates revenues, gross earnings, or turnover exceeding Rs. 50 lakhs for services rendered and Rs. 1 crore for businesses. Section 194A of the Income Tax Act exempts Hindu Undivided Families and other people from certain restrictions.

All other organisations classified as "assessees" under the Income Tax Act of 1961, excluding individuals and HUF under specific circumstances, including partnerships, companies, associations of persons (AOP), and bodies of individuals (BOI).

When is TDS under Section 194A Deducted?

The entities mentioned above are required to deduct this type of income tax, whichever comes first:

When the interest payment is credited to the account of the person receiving the tax, or the payee, or when the interest is paid in cash, cheque, draft, or any other manner.
If interest is credited to Interest Payable Accounts, Suspense Accounts, or any other type of account, it will be considered as crediting the payee's account.

TDS Rates under Section 194A

According to current government regulations, TDS is to be deducted at the following rates:

As per the existing government laws, interest should be deducted at a rate of 10% in all circumstances where the beneficiary of interest income can present a PAN Card. When deducting the TDS, a rate of 20% must be used in all situations when the recipient is unable to show a PAN Card.

For TDS to be collected when it is being collected by an entity other than a bank, the income must be greater than a minimum threshold of Rs. 5000; otherwise, the TDS deduction will not be applicable.

For TDS to be collected, interest income must exceed Rs. 40,000 for all payee types (Rs. 50,000 if the payee is a resident senior citizen) in all cases where the entity providing the interest is either a Bank, a cooperative society undertaking banking activities, or a Post Office providing interest on deposits or schemes of the Central Government.

These income slabs and TDS Deduction rates are subject to vary in accordance with government rules and may alter in response to modifications to laws or acts passed by Parliament.

No other tax rates, such as the education tax, the secondary and upper secondary education tax, or the surcharge tax, may be applied to this rate of tax deduction.

For instance, if a customer receives interest of Rs. 50,000 from a bank for a fixed deposit during a specific financial year, the TDS is to be collected at the rate of 10% (given that the recipient is able to present their PAN Card). Since the interest has been credited to the customer's account, this deduction must be made even if they decide not to withdraw it.

Exceptions to Section 194A

TDS will not be deducted by the above-mentioned entities under Section 194A in the following cases:

The payee can be a post office (which offers interest on deposits or Central Government schemes), a cooperative society (which conducts banking operations), or a banking company (to which the Banking Regulation Act applies). TDS need not be deducted if the interest amount subject to tax is less than Rs. 50,000 (in the case of resident elderly citizens) or Rs. 40,000 in all other circumstances.

If the interest amount subject to tax is Rs. 5000 or less

When a business gives a partner credit or pays interest on their capital

TDS is not applicable on interest revenue given to members or any other cooperative society by a cooperative society—that is not a cooperative bank. This provision uses the definition of a cooperative bank found in the Banking Regulation Act, Part V (1949)

On interest income paid for credits made to deposits (apart from time deposits that were started on or after July 1st, 1995) with banks or banking companies covered by the Banking Regulation Act of 1949.

Interest income accrued against deposits under various Central Government schemes and announced in this regard through the Official Gazette. In essence, section 194A of the Income Tax Act exempts interest earned on money placed into savings accounts from TDS deduction.

On interest revenue received from deposits made with a cooperative land development bank, main credit society, cooperative land mortgage bank, or primarily agricultural society; or, in the event that the deposits are not time deposits made with a cooperative society that engages in banking and are not made after July 1st, 1995

Against any interest income that is paid or credited by the federal government in accordance with the provisions of the Estate Duty Tax Act of 1953, the Income Tax Act of 1961, the Companies Profits Surtax Act of 1964, the Wealth Tax Act of 1957, the Gift-tax Act of 1958, the Super Profits Tax Act of 1963, or the Interest Tax Act of 1974.

Against interest income paid on compensation income awarded by the Motor Accidents Claims Tribunal, provided that the total income or amount paid during the relevant financial year does not exceed Rs. 50,000

Against interest income credited from the Motor Accidents Claims Tribunal's award of compensation

On interest revenue accrued, collected, paid, or credited against Zero-Coupon Bonds that is either payable or paid by a Scheduled Bank, Public Sector Company, Infrastructure Capital Fund, or Infrastructure Capital Company

Regarding interest income that is earned and mentioned in Section 10 of the Income Tax Act of 1961 clause 23FC

Regarding interest income credited or paid to a cooperative society that conducts banking operations or a banking corporation subject to the 1949 Banking Regulation Act/any financial institution founded in accordance with a Central, Provincial, or State law/LIC/UTI/any organisation or association that does insurance business/any other organisations, groups, entities, or classes of organisations that the Central Government has, for reasons documented in writing and announced in the Official Gazette, exempted from TDS Deduction under section 194A

Time Limit to Deposit TDS under Section 194A

The tax deducted from April to February must be deposited by the seventh of the following month, at the latest. The tax that was withheld in March must be deposited by April 30 at the latest. For instance, taxes withheld on April 25 must be deposited by May 7th at the latest, while taxes withheld on March 15th must be deposited by April 30th at the latest.

Applicability of Lower TDS Rate on Interest Income

A reduction in the TDS Deduction rate may be requested by the interest income recipient. The application must be sent to the Income Tax Authorities' assessment authority, which will subsequently provide the company deducting the tax with a certificate stating that the TDS would either be reduced or not collected. Section 197 of the Income Tax Act of 1961 specifies the conditions that must be met to get a certificate of application for reduced rates. The following circumstances lead to the issuance of such a certificate:

Only TDS deductions made under sections 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194I, 194J, 194K, 194LA, or 195 of the Income Tax Act of 1961 should be subject to the lower rate of deduction or a condition of no deductions.
To apply for a certificate under Section 197, the applicant must have a valid PAN Card.
Form Number 13 should be used to apply for the certificate of application of a reduced rate of TDS.
The person in charge of giving the applicant their interest income will receive a copy of the certificate outlining the requirements directly from the applicant.
It is not possible to obtain such a certificate retroactively.

Before granting a certificate for a reduced tax deduction rate, the Income Tax Authorities' assessing officer is required to take into account the guidelines outlined in Section 28AA of the Income Tax Act of 1961. If the application is denied, the evaluating officer is required to document and convey the reasons for the denial.

Illustrations

Illustration 1: A non-senior customer of a bank receives ₹60,000 in interest on a fixed deposit. Since the interest amount exceeds ₹40,000 and falls beyond the section 194A TDS limit, the bank is required to deduct TDS at a rate of 10%.

Illustration 2: A person sends a financial institution Form 15G. Since the person has stated that their total income does not exceed the basic exemption limit, the financial institution is not required to withhold TDS on their interest income.

Illustration 3: A member of a cooperative organisation receives ₹10,000 in interest on their savings deposit. Since cooperative societies do not have to take TDS from member interest, harmonic societies do not have to do so.

Conclusion

Section 194A is an important provision of the ITA as it assists taxpayers in adhering to tax regulations and paying the appropriate tax on their interest income. If you have doubts or concerns regarding this section, you must consult an expert.

FAQ

Q1. What is the threshold limit for TDS on interest?

Under section 194A, TDS will be deducted where interest income exceeds Rs. 40,000 for all payee types (Rs. 50,000 if the payee is a resident senior citizen); in all other cases, the limit is Rs. 5000. The entity providing the interest can be a bank, a cooperative society carrying out banking activities, or a post office offering interest on deposits or schemes of the Central Government. Moreover, section 194A exempts accounts from TDS deduction in the event of interest on savings banks.

Q2. Who has to deduct TDS under Section 194A?

As long as the requirements outlined for the deduction in Section 194A are satisfied, the person paying interest—aside from interest on securities—is required to deduct TDS.

Q3. When is TDS not required to be deducted?

As per Section 194A of the Income Tax Act, no TDS is necessary to be withheld from payments made by individuals or Hindu Undivided Families (HUFs) if their sales, gross receipts, or turnover from business or profession do not exceed Rs. 1 crore (for businesses) or Rs. 50 lakhs (for services). In addition, other individuals and HUFs are exempt from Section 194A.

Q4. Is interest from savings accounts deducted under 194A?

No, this provision only applies to interest on fixed deposits and recurring deposits. TDS regulations do not apply to interest earned on savings accounts.

Q5. Is TDS on interest paid to partners deducted?

No, Section 194A exempts interest paid by a partnership firm to its partners from TDS deduction.

Q6. Is TDS applicable on EMI of Home Loans?

Section 194A requires TDS to be deducted on the interest component. That is, TDS provisions do not apply if any nationalised banks receive the EMI payments. Section 194A does not apply to other non-banking financial institutions such as LIC Housing Finance and Reliance Capital.

Q7. What is the difference between Section 194 and 194A?

The Income Tax Act's Section 194 specifies how TDS must be subtracted from all payable interest, including interest from unsecured loans and fixed deposits. With the exception of interest on securities, such as interest on loans, advances from non-banking institutions, and fixed deposit interest, Section 194A deals with the TDS deductions on interest.

Q8. What is the rate of TDS under Section 194A?

When the payee provides the PAN, the TDS rate is 10%. For interest credited from May 14, 2020, to March 31, 2021, this rate was 7.5% as a government COVID-19 alleviation mechanism.

Q9. How to deposit TDS under Section 194A?

Visit the official website, log in, and provide the necessary information. Choose the method of payment, select TDS/TCS due by the taxpayer, and follow the instructions to continue.

Q10. What happens if TDS is deducted but not deposited by the due date?

If TDS is deducted but not deposited on time, the employer or deductor is liable to pay interest for late payment under Section 201(1A). The interest is 1.5% per month or part of the month from the date of deduction to the date of actual deposit.

Q11. Can a non-resident be liable for TDS under Section 192?

Yes, if a non-resident receives income classified as salary from an employer in India, TDS under Section 192 will apply based on the income tax rules applicable to non-residents.

Q12. Is TDS applicable on retirement benefits like Gratuity and Leave Encashment?

No, TDS is not deducted on retirement benefits such as Gratuity and Leave Encashment, provided these amounts are exempt from tax under Section 10 of the Income Tax Act.

Q13. Is TDS under Section 192 applicable on perquisites?

Yes, TDS is applicable on perquisites (non-monetary benefits provided by the employer), and the value of these perquisites is added to the employee’s taxable salary.

Q14. What are the consequences of late filing of TDS returns?

Failure to file TDS returns by the due date results in a penalty of Rs. 200 per day, continuing until the return is filed, up to the TDS amount. Additionally, a penalty between Rs. 10,000 to Rs. 1,00,000 may be imposed under Section 271H.

Q15. Can an employee submit investment proof for reducing TDS?

Yes, employees can submit proof of investments and eligible deductions under Sections 80C to 80U, which will reduce their taxable salary, thereby reducing the TDS liability.

Q16. What is the maximum exemption limit for senior citizens for TDS purposes?

For senior citizens (aged 60 years and above), the exemption limit under Section 192 is Rs. 3,00,000, while for super senior citizens (aged 80 years and above), it is Rs. 5,00,000.

Q17. What is the treatment of bonus and incentive payouts under TDS?

Bonus and incentives are considered part of salary income and are subject to TDS under Section 192. These are added to the employee’s gross salary and taxed according to the applicable slab rates.

Q18. Are there any rebates available to reduce TDS liability?

Employees can claim a rebate under Section 87A if their total income is less than Rs. 5,00,000, which reduces their tax liability, and hence the TDS deducted.

Q19. How does TDS apply to expatriates working in India?

Expatriates working in India are subject to TDS on salary under Section 192, provided they qualify as tax residents of India. The TDS is calculated as per their income and applicable tax slabs.

Q20. Can a tax refund be claimed if excess TDS is deducted?

Yes, if excess TDS is deducted, the taxpayer can claim a refund by filing their income tax return. The Income Tax Department will process the refund after verifying the return.

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