Section 194A: TDS on Interest other than Interest on Securities

What is Section 194A of the Income Tax Act?

It describes and lays out the provisions under which TDS will be applicable for a deduction on interest incomes or payments on anything but securities.

Following are some of its salient features:

1. TDS is deductible on interest against fixed deposits, recurring deposits, loans, and advances of both a secured (for instance, against collateral) and unsecured nature.
2. TDS Deductible on interest against securities are also considered under the TDS rules; however, the provisions with respect to that are covered under Section 193 of the Income Tax Act.
3. This section is only applicable to the residents of India. Hence, all the provisions of section 194A are not applied to Non-Resident Indians.
4. Payments made to NRIs are also subject to TDS deductions, but that portion is covered in Section 195 of the Income Tax Act.
5. In case an individual or an entity who is to be assessed for such interest income is not liable to pay taxes since their incomes do not exceed the minimum income slab, which is taxable as per the government regulations, the respective entities can submit a copy of either Form 15G (for resident Indians under the age of 60 and Hindu Undivided Families) or Form 15H (for resident Indians either turning 60 during the Financial Year or who have already turned 60) to the payer of the interest.

Who deducts TDS under Section 194A of the Income Tax Act?

The payer/deductor are required to deduct TDS according to section 194A:

1. An individual or a Hindu Undivided Family provided that their sales/gross receipts/turnover from business or profession exceeds Rs. 1 crore(in case of a business) and Rs. 50 lakhs in case of services. Other individuals and Hindu Undivided Families are exempted from these provisions of Section 194A of the Income Tax Act.
2. All other entities described as "assessees" by the Income Tax Act of 1961, such as a Partnership, a Company, an Association of Persons (AOP), or a Body of Individuals (BOI) other than an individual and HUF subject to certain conditions.

When TDS is deducted under section 194A?

TDS under section 194A has to be deducted in the following manner:

1. This type of income tax is to be deducted by the entities described above, either at the time of payment of interest thereof in either cash, cheque, draft, or any other mode or when the said interest payment is credited to the account of the individual receiving the tax, i.e., the payee; whichever is earlier.
2. In the cases in which such interest is credited to accounts such as Interest Payable Accounts or Suspense Accounts or any other accounts, It will be deemed as credited to the account of the payee.

What are the rates of TDS?

Following are the rates at which TDS is to be deducted under the current government regulations:

1. In all the cases where the recipient of interest income can produce a PAN Card, the interest should be deducted at a rate of 10% according to the current governmental regulations. In all cases where the recipient cannot produce a PAN Card, a rate of 20% is to be applied while deducting the TDS.
2. When the TDS is being collected by any entity other than banks, the income must exceed a minimum limit of Rs. 5000 for TDS to be collected; in the absence of that, the TDS deduction will not apply.
3. In all the 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, the income in interest must exceed Rs. 40,000 for all types of the payee ( Rs. 50,000 if the payee is a resident senior citizen) for TDS to be collected.
4. These rates of TDS Deductions and income slabs are subject to change as per governmental regulations and can change with a change in laws or acts enacted in the Parliament.
5. It must also be noted that no other rates of taxes can be added to this rate of tax deduction, for instance, education tax, secondary and higher secondary education tax, or surcharge tax.

As an example, in case the Bank in question is providing interest of Rs.80,000 to a customer for a fixed deposit in a particular financial year, the TDS is to be collected at a rate of 10% (assuming that the recipient can produce a PAN Card) on Rs.80,000. Such a deduction is to be made regardless of whether the customer withdraws the interest provided, as it has been credited to their account.

What is the time limit for depositing TDS collected under section 194A?

TDS collected in March shall be deposited to the government by the 30th of April, and for the rest of the months, i.e., from April to Feb, TDS collected shall be deposited by the 7th of the next month

Under what conditions will the provisions of Section 194A not be applicable?

TDS is not required to be deducted by the above-mentioned entities where:

• Payee is either a Banking Co. (to which the banking regulation act applies), or Cooperative society (undertaking Banking activities), or a Post Office (providing interest on deposits or schemes of the Central Government). The amount of interest is subject to tax is less than Rs. 50,000 (in case of resident senior citizens) or Rs. 40,000 in all other cases.
• If the interest amount subject to tax is Rs. 5000 or less.
• In cases where a firm is either crediting or paying interest to a partner on their capital.
• On interest income paid by a cooperative society, which is not a cooperative bank, to a member or any other cooperative society. Under this clause, a cooperative bank is defined by Part V of the Banking Regulation Act (1949).
• On interest income paid to or credited to:
  1. A banking company to which the Banking Regulation Act of 1949 applies or a cooperative society engaged in banking activities.
  2. Any financial corporation established under a State, Provincial, or Central Act.
  3. The Life Insurance Corporation of India (LIC) was established by the Life Insurance Corporation Act (1956).
  4. The Unit Trust of India, established by the Unit Trust of India Act (1963)
  5. Any company or society engaged in the business of insurance.
  6. Any other institutions, associations, bodies, or classes of institutions which the Central Government has exempted from TDS Deduction under section 194A via reasons recorded in writing and notified via the Official Gazette.
• Interest income accrued against deposits under various schemes of the Central Government and notified in this respect via the Official Gazette.
• On interest income paid for credited on deposits (other than time deposits which have been initiated either on or after July 1st, 1995) with a Bank or a Banking Company to which the Banking Regulation Act of 1949 applies. Essentially, interest accrued on income deposited to savings accounts is not subject to TDS Deduction under section 194A of the Income Tax Act.
• On interest income accrued against:
  • Deposits made with a primarily agricultural society, primary credit society, cooperative land mortgage bank, or a cooperative land development bank
  • Deposits are not time deposits made after the 1st of July 1995 with a cooperative society other than the one mentioned above in subclause (a) engaged in banking.
• Against any interest income paid or credited by the central government paid under the provisions of either the Income Tax Act of 1961, the Indian-Income Tax Act of 1922, the Estate Duty Tax of 1953, the Wealth Tax Act of 1957, the Gift-tax Act of 1958, the Super Profits Tax Act of 1963, the Companies Profits Surtax Act of 1964 or the Interest Tax Act of 1974.
• Against such interest income credited out of interest on compensation amount awarded by the Motor Accidents Claims Tribunal.
• Against such interest income paid on compensation income awarded by the Motor Accidents Claims Tribunal, wherein the total income or the amount paid during the corresponding financial year does not exceed a sum of Rs. 50,000.
• On interest income earned or accrued, paid or credited, against Zero-Coupon Bonds which is either paid or is payable by a Public Sector Company, Infrastructure Capital Fund or Infrastructure Capital Company or Infrastructure debt fund or a Scheduled Bank.
• On interest income earned and referred to in clause 23FC of Section 10 of the Income Tax Act of 1961.

Can I apply for the rate of TDS Deduction to be lowered on interest incomes?

Yes, a recipient of interest income can apply for the rate of the TDS Deduction to be lowered. The application should be made out to the assessing authority of the Income Tax Authorities, who will then issue a certificate stipulating either a reduction or non-collection of the TDS to the entity deducting the tax. The provisions under which a certificate of application for lower rates can be obtained are specified under Section 197 of the Income Tax Act of 1961. The following are the conditions under which such a certificate is issued:

1. The lower rate of deduction or a condition of no deductions should only apply to TDS deductions under sections 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194I, 194J, 194K, 194LA or 195 of the Income Tax Act of 1961.
2. The applicant must possess a valid PAN Card; otherwise, they cannot apply to obtain a certificate under Section 197.
3. The application for obtaining the certificate of application of a lower rate of TDS is to be made via Form Number 13.
4. The certificate stipulating the requirements will be made out directly to the person responsible for paying the interest income to the applicant.
5. Such a certificate cannot be obtained with a retrospective effect.

The assessing officer under the Income Tax Authorities must consider the rules stipulated under Section 28AA of the Income Tax Act of 1961 before making the certificate for a lower rate of Tax Deduction. In case the application is rejected, the assessing officer must record and communicate the reasons for the rejection of the application.