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

What is Section 194A of Income Tax Act?

Section 194A of the Income Tax Act pertains to the deduction of TDS (Tax Deducted at Source) on interest other than interest on securities. This includes:

• Interest on Fixed Deposits
• Interest on Loans
• Interest on Advances (other than those provided by banks)

The purpose of Section 194A is to ensure that tax is collected at the source of income, promoting better tax compliance and reducing evasion.

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

The payer/deductor is 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:

Standard TDS Rate: 10% TDS is deducted if the recipient provides a PAN; otherwise, TDS is applied at 20%.

• Thresholds for TDS Deduction:
  • For nonbank entities: TDS applies only if interest income exceeds ₹5,000.
  • For banks, cooperative societies offering banking services, and post offices: TDS applies if interest income exceeds ₹40,000 (₹50,000 for resident senior citizens).
• Other Regulations:
  • No additional surcharges or education taxes apply to these TDS rates.
  • Example: For a bank interest payment of ₹80,000 to a PANholding customer, 10% TDS is deducted and credited to the customer’s account regardless of withdrawal.

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

What are the Exemptions From 194A TDS Section of Income Tax Act?

Section 194A of the Income Tax Act governs the deduction of Tax Deducted at Source (TDS) on interest other than interest on securities. Here are some key exemptions under this section:

• Interest earned on savings bank accounts is exempt from TDS.
• Interest on income tax refunds is exempt from TDS.
• Interest paid by a partnership firm to its partners is exempt from TDS.
• Interest paid to banks, Life Insurance Corporation (LIC), Unit Trust of India (UTI), or insurance companies exempt from TDS.
• Interest paid by cooperative societies to their members or other cooperative societies exempt from TDS.

Additionally, if a declaration is submitted in Form 15G/15H under Section 197A, no tax is deductible if certain conditions are met, such as the recipient being a person other than a company or firm and their total income not exceeding the exemption limit.

Lower TDS Deduction Rate on Interest Income under Section 197

Section 197 of the Income Tax Act, 1961, allows taxpayers to apply for a certificate that permits a lower or nil rate of Tax Deducted at Source (TDS) on their income. This can be particularly beneficial if the TDS rate on your interest income is higher than your actual tax liability.

To apply for this certificate, you need to submit Form 13 to the Assessing Officer (AO) with jurisdiction over your case. The AO will assess your total income and estimated tax liability. If justified, a certificate will be issued specifying a reduced TDS rate or complete exemption from TDS for the financial year.