Section 194A: TDS on Interest
Section 194A is a provision of the Income Tax Act which deals with TDS for interests on loans, advances and fixed deposits. To collect taxes in a time-saving and cost-effective manner, the Government of India has incorporated a system within the Income Tax Act that deducts taxes at the point of generation of income, which is known as Tax Deducted at Source, or TDS. This article discusses Section 194A of the Income Tax Act, which deals with TDS on interest. The article also incorporates the amendments made in relation to the section, in the Union Budget 2019.
The provisions for deduction of taxes at the source is applicable to several payments such as salary, interest, brokerage, commission, royalty and professional fees. Section 194A of the Income Tax Act mentions the provisions concerning TDS on interest excluding than that on securities. TDS must be deducted under Section 194A if interest, excluding that on securities, is paid to a Resident. Therefore, the provisions of this Section are not applicable if payment of interest is made to a Non-Resident Indian. However, TDS will be applicable on payments made to Non-Resident Indians as per Section 195 of the Income Tax Act. The following are the essentials of Section 194A of the Income Tax Act:
- This section mandates the deduction of TDS on interests other than the interests on securities.
- The provisions of Section 194A apply to a Resident Indian only. Therefore, these provisions would not apply when payments of interests are made to a Non-Resident Indian.
- TDS will be applicable on payments made to Non-Resident Indians as per Section 195 of the Income Tax Act.
Every person, excluding an individual or a Hindu Undivided Family, who has to pay interest, except those on securities, to a Resident Indian, is liable to deduct taxes on the interest payable as per Section 194A of the Income Tax Act. An Individual or HUF is liable to deduct TDS under Section 194A under the following conditions:
- If the total sales, gross receipts or annual turnover of a business/profession carried out by an Individual/HUF crosses the threshold specified in Section 44AB during the FY immediately before the FY in which the afore-mentioned amount is credited.
An Individual or HUF is liable to TDS under Section 194A if they are liable to get their respective accounts audited under Section 44AB in the preceding FY.
Time of Deduction
According to Section 194A of the Income Tax Act, the applicable taxes are to be deducted at the time of paying or crediting the interest, whichever is earlier. If the Motor Accident Claims Tribunal awards the compensation, TDS would be deducted at the time of payment. However, TDS is only applicable if the interest exceeds INR 50,000.
Conditions for Deduction of Tax
If the amount of an interest paid or credited exceeds INR 40,000, then the payer shall deduct TDS. This applies even when the amount is likely to be credited and paid in a financial year by:
- A banking company or banking institution or any bank
- A co-operative society that is engaged in the banking business
- A post-office (on deposit under a scheme framed and notified by the Central Government)
Tax is only deductible if the total amount of the interest paid or payable by the deductor in the previous year exceeds INR 5,000. Further, it must be noted that if the amount of interest crosses the maximum permissible amount, TDS would be deducted on the entire amount of interest. From the financial year 2018-19 onwards, no TDS would be deducted on the interest generated up to INR 50,000 by senior citizens. However, either of the following should be the source of the income:
- Deposits with banks
- Fixed deposit schemes
- Deposits with post offices
- Recurring deposit schemes
Computation of Interests
The deductor or the payer may deduct TDS if the amount of interest paid during the previous year exceeds INR 40,000 for banks and INR 5,000 in other cases. The following are the key points that need to be considered while computing TDS.
While estimating the interest paid, the payer has to compute the total amount paid to the payee. For instance, if the interest payable in a particular month of the preceding year is INR 3,000, then there would be no TDS deducted. However, in a later month, the cumulative amount INR 7,000, then the deductee or the payee would have to deduct a TDS on INR 6,000 at the rate of 10% for that particular month.
When TDS is being calculated, banks have to consider all the total interest payments made. For instance, if an individual has a fixed deposit in all the different branches of an individual bank, the cumulative amount of interest paid would be considered while estimating TDS.
The deductor would be required to pay TDS when the interest is accrued if the deposit is for more than a year and the interest is compounded. This is applicable regardless of whether the same is paid or not.
Rates for TDS
The following rates of taxes will be applicable as required:
- 10% as TDS will be applicable when PAN is furnished.
- 20% as TDS will be applicable when PAN is not furnished.
- The amount of surcharge, Education Cess and SHEC will not be added to the above rates. Hence, taxes will be deducted at source at the basic rate.
The following is the time limit in which TDS must be deposited:
- Tax deducted during any months between April to February is required to be deposited on or before the 7th of the immediate month.
- Taxes deducted in the month of March is required to be deposited on or before the 30th of April.
No Deduction of TDS
The deduction of TDS happens under either of the following scenarios:
By declaring under Form 15G/15H under Section 197A
When an individual, being the recipient, submits a declaration under Section 197A to the payer along with their PAN, in such cases, no tax would be deducted if the following conditions are fulfilled as well.
- The recipient is an individual except for a firm or a company.
- If the tax on the total income of the previous year is NIL.
- If the total income does not cross the exemption limit, although, this is not applicable if the recipient is a resident senior citizen.
- If the declaration is given in a duplicate form 15G and 15H for senior citizens. Investors may submit the declaration in the case of Senior Citizens Saving Scheme of 2004.
- If the Nominees of the investors of the Scheme also produces the declaration after the death of the depositor at the time of payment.
- On submitting the declaration to the bank, no taxes would be deducted on payment of interest, subject to certain conditions.
By submitting an application in Form 13 under Section 197
According to the provisions given under Section 197, the recipient may apply in Form 13 in order to obtain a certificate authorising the payer to deduct taxes at a lower rate/no taxes under certain conditions to the Assessing Officer. There is no specific time limit for the application, and it may be filed at any given time before the actual deduction of tax. This certificate cannot be applied by a recipient who does not own a PAN. The certificate would be issued directly to the individual responsible for paying income under advice to the applicant. The certificate cannot be issued with a retrospective effect. The recipient may furnish a copy of the certificate to the individual responsible for paying the income for no deduction/lower of tax at source.
A few other cases where no tax would be deducted at the source are as follows.
- When the interest is paid to LIC, established under the Life Insurance Corporation Act of 1956.
- When the interest is paid to any co-operative society or company under the business of insurance.
- If the interest is paid on any financial corporation under the Central, State or Provincial Act.
- If the interest is paid on Unit Trust of India, established under the Unit Trust of India Act of 1963.
- If the interest is paid under any of the provisions of the Income Tax Act of 1961 or the Wealth Tax Tax of 1957 that was formulated by the Government.
- If the interest paid to any bank under the regulation of the Bank Regulation Act of 1949 or any co-operative society. This also includes the co-operative land mortgage bank.
- If the interest is paid or credit by the Central Government under any given provision of the Income Tax Act of 1961 or the Wealth Tax Act of 1957.