TDS, or Tax Deducted at Source, was created to help prevent tax evasion on income earned by people and businesses. People can earn money in many ways, like salaries, dividends, bonuses, commissions, and interest. Each of these adds up to a significant amount. Section 194A focuses on interest payments, which are crucial for banks, investments, and the savings of everyday Indians. It’s important for everyone to understand this section.
What is Section 194A: An Overview of TDS on Interest Payments in India?
Section 194A of the Income Tax Act deals with TDS (Tax Deducted at Source) on interest payments, excluding interest on securities. This includes:
- Interest on Fixed Deposits
- Interest on Loans
- Interest on Advances (not from banks)
The aim of Section 194A is to collect tax at the source, helping improve tax compliance and reduce evasion.
What Are the Key Features of TDS on Interest Payments Under Section 194A?
- TDS Applicability: TDS is deducted on interest from fixed deposits, recurring deposits, loans, and both secured and unsecured advances.
- Interest on Securities: TDS on interest from securities is covered under Section 193 of the Income Tax Act.
- Resident Status: This section applies only to residents of India. Non-Resident Indians (NRIs) are not covered by Section 194A; their interest payments fall under Section 195.
- Exemptions for Low Income: If an individual or entity does not have taxable income above the minimum threshold, they can submit Form 15G (for residents under 60) or Form 15H (for residents aged 60 and over) to avoid TDS on their interest income.
Who Is Responsible for Deducting TDS Under Section 194A?
TDS under Section 194A must be deducted by:
- Individuals and Hindu Undivided Families (HUF): They are required to deduct TDS only if their business or professional income exceeds Rs. 1 crore for businesses or Rs. 50 lakhs for services. Those with lower income levels are exempt from this requirement.
- Other Entities: This includes various “assessees” defined by the Income Tax Act of 1961, such as partnerships, companies, Associations of Persons (AOP), and Bodies of Individuals (BOI). These entities must also deduct TDS under specific conditions.
When Is TDS Deducted Under Section 194A?
TDS under Section 194A must be deducted in the following ways:
- Timing of Deduction: The deduction is made by the entities mentioned earlier either when the interest is paid (in cash, cheque, draft, or any other method) or when it is credited to the recipient’s account, whichever happens first.
- Special Cases: If the interest is credited to accounts like Interest Payable Accounts, Suspense Accounts, or similar accounts, it is still considered as credited to the payee’s account.
What Are the TDS Rates?
Here are the current TDS rates for interest payments:
- With PAN Card: If the recipient provides a PAN Card, TDS is deducted at a rate of 10%.
- Without PAN Card: If the recipient does not provide a PAN Card, TDS is deducted at a rate of 20%.
- Minimum Limit for TDS: For entities other than banks, TDS is deducted only if the interest income exceeds Rs. 5,000. For banks, cooperative societies, or Post Offices, TDS applies only if the interest exceeds Rs. 40,000 (or Rs. 50,000 for resident senior citizens).
- Regulatory Changes: These rates and income limits can change with new government regulations or laws passed in Parliament.
- No Additional Taxes: No extra taxes, like education cess or surcharges, are added to the TDS rate.
Example: If a bank pays Rs. 80,000 in interest on a fixed deposit and the recipient has a PAN Card, TDS will be deducted at 10% on the full amount of Rs. 80,000. This deduction occurs regardless of whether the recipient withdraws the interest.
What Is the Time Limit for Depositing TDS Collected Under Section 194A?
TDS collected under Section 194A must be deposited to the government as follows:
- For March Collections: TDS must be deposited by April 30th.
- For Collections from April to February: TDS must be deposited by the 7th of the following month.
What Are the Exemptions from TDS Under Section 194A of the Income Tax Act?
TDS is not required to be deducted under Section 194A in the following cases:
- Banking and Financial Institutions: If the payee is a banking company, cooperative society (engaged in banking), or a Post Office, and the interest amount is less than Rs. 50,000 for resident senior citizens or Rs. 40,000 for others.
- Low Interest Amount: If the interest amount subject to tax is Rs. 5,000 or less.
- Interest to Partners: No TDS is needed under section 194A for interest paid to partners on their capital in a firm.
- Interest from Non-Banking Cooperative Societies: Interest paid by a cooperative society (not a cooperative bank) to a member or another cooperative society is exempt.
- Specific Entities: Interest paid to:
- Banking companies under the Banking Regulation Act of 1949.
- Cooperative societies engaged in banking.
- Financial corporations established by state or central acts.
- Life Insurance Corporation of India (LIC).
- Unit Trust of India.
- Companies or societies in the insurance business.
- Other institutions exempted by the Central Government, as published in the Official Gazette.
- Government Schemes: Interest from deposits under various Central Government schemes, as notified in the Official Gazette.
- Savings Account Interest: Interest on deposits (except time deposits initiated after July 1, 1995) with banks under the Banking Regulation Act of 1949 is exempt from TDS.
- Agricultural Societies: Interest from deposits with agricultural societies, primary credit societies, cooperative land mortgage banks, or cooperative land development banks.
- Cooperative Societies: Interest on non-time deposits made after July 1, 1995, with cooperative societies (other than those mentioned above) is exempt.
- Compensation Interest: Interest on compensation awarded by the Motor Accidents Claims Tribunal, provided the total amount does not exceed Rs. 50,000.
- Zero-Coupon Bonds: Interest from Zero-Coupon Bonds issued by public sector companies, infrastructure funds, or scheduled banks is exempt.
- Section 10(23FC): Interest income referred to in clause 23FC of Section 10 of the Income Tax Act is also exempt.
Can I Request a Lower TDS Rate on Interest Income?
Yes, you can apply to have the TDS rate on your interest income reduced. Here’s how the process works:
- Submit your application to the assessing authority of the Income Tax Department.
- They will issue a certificate indicating either a lower TDS rate or that TDS should not be collected at all.
- This is governed by Section 197 of the Income Tax Act of 1961.
What Are the Conditions for Obtaining a Lower TDS Rate Under Section 194A?
- Applicable Sections: The reduced rate or exemption applies only to TDS under specific sections, including 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194I, 194J, 194K, 194LA, or 195.
- PAN Requirement: You must have a valid PAN Card to apply for a lower rate.
- Form Submission: Use Form 13 to submit your application for the certificate.
- Direct Issuance: The certificate will be issued directly to the entity paying the interest to you.
- No Retrospective Effect: The certificate cannot apply retroactively.
- Assessment Officer’s Consideration: The assessing officer must consider the guidelines under Section 28AA of the Income Tax Act when issuing the certificate. If your application is denied, the officer must provide written reasons for the rejection.
Frequently Asked Questions (FAQs) on Section 194A
What is the TDS limit for interest payments under Section 194A?
For Section 194A, TDS is deducted when interest exceeds Rs. 40,000 for payees like banks, cooperative societies, or Post Offices (Rs. 50,000 for resident senior citizens). For other cases, the limit is Rs. 5,000. Note that interest on savings accounts is not subject to TDS under this section.
Who is responsible for deducting TDS on interest payments?
The payer—whether it’s for salaries, commissions, professional fees, interest, rent, etc.—is responsible for deducting TDS before making the payment.
Is TDS applicable to interest earned on savings accounts?
Interest earned on savings accounts is taxable but not subject to TDS under Section 194A. Instead, deductions on savings account interest are allowed up to Rs. 10,000 per year under Section 80TTA.
What is the percentage rate of TDS deducted under Section 194A?
TDS under Section 194A is generally deducted at 10%. If the payee does not provide a PAN, the rate increases to 20%.
Is TDS applicable on EMI payments for home loans?
Yes, TDS must be deducted on the interest portion of EMIs. This applies to loans from non-banking financial institutions, while TDS provisions do not apply to nationalized banks.
What is the TDS rate under Section 194?
The TDS rate under Section 194 is 10%.
