In this part of the TDS series, we’ll learn in-depth about
- TDS on Interest (Other Than Interest on Securities): Section 194A
- TDS on Dividends: Section 194
Section 194A: TDS on Interest other than Interest on Securities
As we all know that “Interest” or simply “Byaaz” is a very wide term, it can include anything like interest paid on loan from friend/ relative or interest paid by the bank on fixed deposits, interest on debentures. Section 194A, specifically excludes “interest on securities”. This means, any interest in security (issued by the government) and interest on debentures/securities (issued by the company a corporation or local authority). So, let’s dive in and understand the provisions related to Section 194A.
What is the rate of TDS u/s 194A?
TDS is to be deducted at 10% on the amount of interest credited under section 194A. It is deducted either at the time of payment(via cash, cheque, draft etc) or credit whichever is earlier.
Who is required to deduct TDS u/s 194A?
The person (company, firm, AOP/BOI etc) who is paying the interest amount (i.e. payer) is responsible to make the deduction of tax before releasing the payment. However, an individual or HUF is not required to deduct TDS(but will be required to deduct tax if they are liable to audit u/s 44AB).
Situations Which Do Not Require Tax Deduction u/s 194A :
There are special situations where TDS u/s 194A is not required to be made. Some relevant ones are enlisted as follows:
Treatment of Interest in Income Tax Returns
- When the total amount of interest paid on deposits (or to be paid) during the whole financial year is not more than Rs.10000 (paid by a bank/ co-operative society/ post office) or Rs.5000 (in other cases). Deposits include fixed, time and recurring deposits.
- Interest income paid to bank company, co-operative society, financial corporation, LIC, UTI, company or cooperative society involved in the insurance business.
- Interest income (as per 194A) paid by a partnership firm to its partner.
- An income not exceeding Rs.50000, when actually paid by Motor Accidents Claim Tribunal during a financial year.
- As per Budget 2018, a new Section 80TTB has been introduced which provides deduction in interest income on deposits with banks and post office to senior citizens. The deduction limit is up to Rs.50000. Hence, consequently TDS u/s 194A on such interest income shall not be deducted up to Rs.50000.
Interest received is shown under the head “Income from other sources” and added in total income of the assessee. However, interest received from bank is eligible for deduction under 80TTA and 80TTB.
Section 194: TDS on Dividends
All of us loves “dividends”. Many of us, our friends, relatives etc buy shares of big companies with the aim to earn good returns in the form of share price hikes as well as dividends. The dividend is simply an equity (and preference) shareholders profit share in the company and section 194 calls for the deduction of tax on such dividend income given to shareholders.
Requirement to deduct TDS under section 194?
A principal officer of a company, which is in the process of declaring dividends (equity or preference or both) in India, is required to deduct tax on dividend covered in the sub-clause (a) or (b) or (c) or (d) or (e) of clause 22 of section 2. But from 1.4.2003, this provision of TDS will only be applicable on dividend as per section 2(22)(e) as dividends covered u/s 2(22)(a) or (b) or (c) or (d) are exempt in the hands of the shareholders.
What is the tax rate of TDS u/s 194?
The rate under this section is 10%. TDS will be deducted at, time of payment(via cash, cheque, draft etc) or credit, whichever is earlier.
What are the exceptions to TDS deduction under section 194?
No tax deduction will be made u/s 194 in case of shareholder (who is an individual), when:
- The dividend is paid by way of account payee cheque & such amount (alone or aggregate during financial year) does not exceed Rs.2500.
- Dividend is covered under section 115-O.
- The dividend is paid to LIC, GIC or its subsidiaries or to any other insurer in respect of the shares that are owned by them or in which they have a full beneficial interest.
- If you have submitted Form I5G/15H as your income is below taxable limit.
What is Section 2(22)(a) or (b) or (c) or (d) of income tax act?
Section 2 sub-section 22 deals with the definition of dividends as per the income tax act.
Section 2(22)(a)- Distribution of Assets Deemed as Dividend
Dividend includes any distribution by a company of accumulated profits, whether capitalized or not if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company.
Section 2(220(b)- Distribution of Debentures etc. Deemed as Dividend
- Any distribution to its shareholders by a company of debentures, debenture-stock or deposit certificates in any form, whether with or without interest and
- Any distribution to its preference shareholders of shares by way of bonus
To the extent to which the company possesses accumulated profits, whether capitalized or not.
Section 2(22)(C)- Distribution of Assets on Liquidation Deemed as Dividend
Dividend includes any distribution made to the shareholders of a company on its liquidation, to the extent to which such distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not.
Section 2(22)(d)- Distribution on Reduction of Share Capital Deemed as Dividend
Dividend includes any distribution to its shareholders by a company on the reduction of its capital to the extent to which the company possesses accumulated profits, whether capitalized or not.
Section 2(22)(e)- Loans & Advances by Closely held Company Deemed as Dividend
Dividend Includes- -Any payment by a company not being a company in which public are substantially interested -of any sum by way of loan or advance to be-
- A shareholder is the beneficial owner of shares
- Holding not less than 10% of the voting power
|Deemed as the dividend in the hands of the shareholder
- to any concern
- in which such a shareholder
- is a member or a partner
- and in which he has a substantial interest
|Deemed as the dividend in the hands of concern
- to any person
- On behalf of or for the individual benefit of such a shareholder
|Deemed as Dividend in the hands of the shareholders
Frequently Asked Questions
Q- Is TDS deducted on interest paid to bank?
Ans. Yes, TDS is deducted at the rate of 10% of the interest earned from the bank, if the interest income is more than Rs 10,000 in a year, however, Budget 2019 has increased this threshold to INR 40000. If the account holder has not submitted his or her PAN details, the rate of Tax deduction at source by the bank will be 20% of the interest charged.
Q- Is TDS applicable on EMI of loan?
Ans. NO, TDS is not applicable on EMI loan in case interest is paid to banks.. TDS is only required to be deducted if interest on loan is paid to other parties.
Q- Is TDS applicable on saving account interest?
Ans. Yes, Tax deduction at Source is applicable on interest earned from savings account. The income from interest must exceed the limit of Rs 40,000 (As amended in Budget 2019) to deduct TDS at the rate of 10%.
Q- Is TDS deducted on interest on loan?
Ans. Yes, tax deduction at source is applicable when interest is paid by others on loan at the rate of 10%.
Q- Who is required to deduct TDS on interest?
Ans. The person or a company who pays the interest amount, deducts tax deduction at source before releasing the payment.
Q- Is there any TDS deduction on the interest earned from the savings bank account or is it applicable for fixed deposits only?
Ans. Yes, Tax deduction at Source is applicable on interest earned from savings account. The income from interest must exceed the limit of Rs 10,000 to deduct TDS at the rate of 10%.
Q- I had not deducted TDS on purchase of a flat and paid the builder in full. Now the builder is asking me to pay TDS from my pocket. How should I handle this situation?
Ans. This is the duty of the buyer to apply tax deduction at source and deduct at the rate of 1% from the sellers amount. If you failed to do so, you can either pay TDS to Government from your pocket and add to your cost of the flat. Otherwise you can pay TDS to Government from your pocket and claim for refund from your seller showing Form 26QB.
Q- How do I claim a previous year TDS refund if the ITR is not filed for that year and doesn't pay the income tax?
Ans. If an individual wants to claim TDS of previous year he or she has to file an income tax return for that year. Even if the income is not taxable, but if TDS is deducted from your income, you have to file ITR for getting refund of your TDS amount.
Q- Can I get credit of tds deducted, though it is not shown in 26AS? If yes, how?
Ans. If Form 26AS is not showing the deduction of TDS on your income, then the deductor has not deposited it with the government. In this condition,you are required to ask the deductor to pay the same to the government and file TDS return.