Section 194A of Income Tax Act: TDS Deduction on Interest

The Income Tax Department is responsible for levying, administering, recovering, and collecting direct taxes in India. Simply put, it lays down different rules and regulations under various sections related to direct taxation in the country. One such section is 194A, which is discussed below.

What is section 194A?

This section involves the rules about tax deducted at source (TDS) on interests that are earned on various investments except on securities. Taxpayers should familiarize themselves with this section of the Income Tax Act, 1961 to maximize the benefits available.

Section 194A of the Income Tax Act, 1961 deals with the TDS on the interest earnings from investments like fixed deposits or interest on loans and advances not taken from banks.

The following are the fundamental provisions of this section:

• In addition to individuals and Hindu Undivided Families (HUFs), entities paying interest to Indian residents must deduct TDS
• If an individual or HUF requires auditing of their accounts under section 44AB of the Income Tax Act, 1961, TDS on interest paid must be deducted
• Individuals and HUFs need to deduct TDS if the business turnover or gross receipts are more than INR 1 crore for businesses and INR 50 lakhs for professionals during the preceding year

Moreover, the section is applicable for Indian residents and its provisions are not for Non-Resident Indians (NRIs) who are regulated by the provisions under section 195 of the Income Tax Act, 1961.

Why is it important?

Interest earned on investments other than securities from banks is liable for TDS deductions as per the provisions of this section.

The payer must deduct 10% of the total interest if the permanent account number (PAN) of the recipients is available or 20% of the total interest if PAN details of the recipients are not available.

Understanding the provisions of this section and how TDS is applicable allows taxpayers to plan their income tax liability.

Additionally, if the payer has deducted TDS when it is not applicable, the recipient can file the Income Tax Returns (ITRs) and claim a refund on the excess amount.

To avoid filing a refund claim, it is recommended that recipients who are not subject to TDS submit Form 15G or 15H as applicable to the payer before the amount is deducted.

Understanding TDS deduction under section 194A

The payer must deduct TDS if the interest earnings during a financial year (FY) are more than INR 40,000 and the payer is:

• A banking company, banking institution, or any bank
• A cooperative society involved in the banking business
• A post office accepting deposits under the schemes notified and framed by the Central Government

From FY 2018–2019, TDS is not applicable on interest earned by senior citizens if the total amount does not exceed INR 50,000.

Moreover, the interest should be earned on the following types of investments:

• Bank deposits
• Recurring deposit schemes
• Post office deposits
• Fixed deposits

When is the lower or NIL rate deduction of TDS applicable?

This is applicable under the two below-mentioned circumstances:

When a declaration in Form 15G or 15H under section 197A is submitted

If a declaration as per the provisions of section 197A is submitted along with the taxpayer’s PAN details, then no tax is deducted if the following conditions are met.

• The recipient is not a firm or a company
• Tax liability on the total income for the previous year is NIL
• Total income is not more than the exemption limits; however, this condition does not apply to senior citizens
• The declaration is submitted in duplicate (Form 15G for regular individuals and 15H for senior citizens)
• Nominees of the Senior Citizens’ Savings Scheme (SCSS) can also submit the declaration at the time of payment in case of the depositor’s demise

When the declaration is submitted, the banks will not deduct TDS while paying the interest.

When an application in Form 13 under section 197 is submitted

• As per the provisions of this section, taxpayers can apply to their Assessing Officers via Form 13 and procure a certificate authorizing the payer to deduct TDS at a lower rate or NIL rates if the conditions are satisfied
• There is no limit for submitting the application and it can be done any time before the deduction; however, if the recipients do not have a PAN card, they cannot submit it
• The certificate is issued to the person responsible for paying the income tax on plain paper under advice to the applicants
• This certificate for deducting TDS at lower or NIL rates cannot be retrospectively issued

The recipient can submit this certificate to the income payer for lower or no TDS deduction.

What is the rate of TDS?

Section 194A TDS rates are applicable as below:

No education cess, secondary and higher education cess (SHEC), or surcharge is added to the basic TDS rates.

Assume that a bank pays INR 20,000 as interest on a fixed deposit to its customer. As the interest amount exceeds the threshold limit (INR 10,000), the bank will deduct TDS at the rate of 10%, which is INR 2,000.

Even if the bank does not actually pay the interest and credits it to the customer’s account, the TDS must be deducted and deposited on or before the predetermined date, which is discussed below:

Time limit for the deposit of TDS

As per the provisions of sec 194A of the Income Tax Act, 1961, TDS is applicable in the following situations:

• Income is credited to the recipients’ accounts
• Payment is made in cash, draft, check, or other modes

Entities that are responsible to deduct TDS on income-generating investments other than securities need to deposit the collected amount within the predetermined time limits.

Even if the accumulated interest has not been credited to the recipients’ accounts, the entities are liable to deposit the TDS amount.

The following are the time limits for depositing the TDS.

• Paid between April and February: 7th day of the following month
• March: Either on or before 30th April

For example, let’s assume that a bank pays interest to its customers on 20th June of the financial year.

The TDS amount has to be deposited on or before 7th July of the financial year. If the bank pays interest on 20th March of the year, the TDS amount must be deposited on or before 30th April of the same year.

About TDS exemption

The following are the exemptions under the 194A TDS section of the Income Tax Act, 1961.

• Interest paid to the partners in a partnership firm
• Interest paid to fellow members by a co-operative society
• Earnings paid to Life Insurance Corporation (LIC), bank and other financial companies, Unit Trust of India (UTI), and other institutions within the insurance industry
• Income not exceeding INR 50,000 during the financial year paid by the Motor Accidents Claims Tribunal

The table below depicts the cases when TDS is not applicable:

Understanding the provisions of section 194A helps taxpayers streamline the process of taking advantage of the available benefits without any delay.

Additionally, entities that pay interest to their clients should also understand the provisions of the section. This ensures the businesses accurately deduct the TDS as applicable and maintain the necessary records.

Making deductions on time and depositing the TDS amount on or before the due date makes sure the business entities do not pay any penalties or face any other consequences.