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What is Section 194A of the Income Tax Act?

It describes and lays out the provisions under which TDS will be applicable for 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 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 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 is required to deduct TDS as per Section 194A of the Income Tax Act?

The following persons are required to deduct TDS according to section 194A:

  1. An individual or a Hindu Undivided Family provided that under and as per Section 44AB of the Income Tax Act of 1961, they are liable to get their accounts audited by a Chartered Accountant. Other individuals and Hindu Undivided Families are exempted from these provisions of Section 194A of the Income Tax Act
  2. .
  3. 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).

When is this deduction of TDS to be made?

The following persons are required to deduct TDS according to section 194A:

  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, 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, conditions laid down under Section 194A shall apply and TDS will have to be deducted.

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

TDS collected in the month of march shall be deposited to the government by 30th of April and for the rest of the months TDS collected shall be deposited by 7th of the next month.


What are the rates of TDS Deduction?

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. In the cases where the TDS is being collected by any entity other than banks, the income must exceed a minimum limit of 5000 INR 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 40,000 INR 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 50,000 INR to a customer for a fixed deposit in a particular financial year, the TDS is to be collected on a rate of 10% (assuming that the recipient can produce a PAN Card) on 50,000 INR. Such a deduction is to be made regardless of whether the customer withdraws the interest provided, as it has been credited to their account.


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

TDS is not required to be deducted by the following entities:

  • On interest income, either paid or credited or is likely to be paid or credited to the account of the recipient, not exceeding a sum of:
    • 40,000 (forty) thousand INR, where the payer is a Banking company to which the Banking Regulation Act of 1949 can be applied.
    • 40,000 (forty) thousand INR, where the payer is a Cooperative Society engaged the business of Banking.
    • 40,000 (forty) thousand INR, on a deposit with the Post Office framed under a scheme introduced by the Central Government and notified on its behalf.
    • 5000 (five) thousand INR in any other cases.
    • It must also be noted that in case an individual is a senior citizen, the minimum interest income specified under sections (a), (b) and (c), must exceed 50,000 (fifty) thousand INR instead of 40,000 (forty) thousand INR.
  • 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 of that cooperative society or to any other cooperative society. A cooperative bank, under this clause, is defined by Part V of the Banking Regulation Act (1949).
  • On interest income paid to or credited to:
    • A banking company to which the Banking Regulation Act of 1949 or applies, or a cooperative society which is engaged in banking activities.
    • Any financial corporation established under a State, Provincial or Central Act.
    • The Life Insurance Corporation of India (LIC) established by the Life Insurance Corporation Act (1956).
    • The Unit Trust of India, established by the Unit Trust of India Act (1963)
    • .
    • Any company or society engaged in the business of insurance.
    • Any and all 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:
    1. Deposits made with a primary agricultural society, primary credit society, cooperative land mortgage bank or a cooperative land development bank.
    2. Deposits, which are not time deposits made after the 1st of July 1995, with a cooperative society, other than a cooperative society mentioned above in subclause (a) engaged in the business of 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 50,000 (fifty) INR.
  • 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 a Scheduled Bank.
  • On income earned by the way of discounting bills, which, since is not treated as an interest income, is not subject to the provisions of Section 194A of the Income Tax Act.
  • On interest income earned and referred to in clause 23F 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 incomes 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 of lower rates can be obtained are specified under Section 197 of the Income Tax Act of 1961. 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 required 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.


Conclusion

In conclusion, Section 194A provides for all the TDS Deductions under the Income Tax Act on interest payments apart from interest on securities. When it comes to professionals, if sales were more than twenty-five lakh rupees in the previous financial year, TDS must be deducted on the interest paid. However, the interest paid to banks and the interest paid by a partnership firm to its partners do not attract TDS at all. TDS is not deducted when the EMI is paid either, for the EMI is paid to the banker and not to the seller. We have cast light on all the intrinsic points as to TDS.

Moreover, it must also be noted that there are various other situations in which the provisions of section 194 will not apply.We have cast light on all the intrinsic points as to TDS.


Frequently Asked Questions

Q- What is the limit for TDS on interest?

Banks and post offices are allowed a 10 % deduction as per the existing norms of TDS or Tax Deducted from Source, if the interest earned from the Savings account exceeds Rs. 10,000 in a single financial year. No relief is provided to any depositor by this in terms of tax on income from interest.


Q- Who is liable to deduct TDS on interest?

The person who is responsible for making payments in the form of salaries, commissions, professional fees, interest, rent etc ,according to TDS or Tax Deducted at Source is liable to deduct a tax of certain percentage before making the full payment to the receiver.


Q- Is TDS applicable on saving account interest?

As per the Income Tax slab rates which are applicable to the investor, the interest earned on savings account is taxable. TDS on saving interest is not deducted similar to FDs and Term Deposits ,whereas under section 80TTA, deduction on savings account is allowed with a maximum of Rs. 10,000 per year.


Q- What percentage of TDS is deducted?

If your total income is taxable, then only TDS or Tax Deducted at Source is deducted. In case where the total income is Rs. 2,50,000 then TDS will not be deducted and this is applicable to women and men below 60 years of age.
The rate of TDS deduction varies from 5% to 30% which is equivalent to the applicable income tax slabs on salary ranges.


Q- When TDS is not required to be deducted?

If the person who makes the payment is an individual or HUF who books are not required to be audited then no TDS will be deducted. TDS gets deducted when the payments are made by individuals and HUF who exceed Rs. 50,000 per month at the rate of 5% even when the individual or HUF is not liable for a tax audit. This happens in the cases of rent payments.


Q- Is TDS applicable on EMI of Home Loan?

DS on the interest portion needs to be deducted under section 194A. i.e. if the EMIs are paid to any of the nationalized banks then TDS provisions are not applicable. Other Non-Banking Financial Institutions like Reliance Capital, LIC Housing Finance etc. are not exempt from section 194A.


Q- Is TDS deducted in interest paid to partners?

In all other cases, if the total turnover exceeds Rs.1 crore in the previous year, TDS must be deducted on interest paid. However, the following types of interest payment do not attract TDS: Interest paid to banks. Interest paid by a partnership firm to its partners.


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CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.