Lending institutions or banks deduct an amount as tax while crediting or paying interest on fixed deposits every financial year. This deduction of tax is called Tax Deducted at Source (TDS) which is covered under the Income Tax Act.
In this article, we will discuss what is Section 194A of the Income Tax Act, what is the importance of Section 194A, when tax deduction applicable, what types of interest are exempted under Section 194A, who is responsible to deduct TDS, when must TDS be deducted, what is the rate of interest on TDS, etc.
The TDS applies to several payments like interest, salary, commission, professional fees, brokerage, royalty, etc. There are three major payment mechanisms under the TDS mechanism namely;
1. TDS on interest other than interest on securities,
2. TDS on interest on securities and
3. TDS on fees for professional/technical services or royalty.
What is Section 194A of the Income Tax Act, 1961?
The Income Tax Act, 1961 under Section 194A deals with tax that must be deducted at source on interest. This Section does not apply to interest on securities). These sources of interest include interest paid by banks on fixed deposits, interest paid on unsecured loans, interest paid on advances and loans, post office deposits, schemes on recurring deposits, etc. This tax is also applied to interest repaid on secured and unsecured credit forms.
This section is not applied to interest payments made to non-residents.
What is the importance of Section 194A?
TDS is an efficient and quick method of collection of taxes, the Income Tax Act has incorporated the TDS mechanism for the generation of income for the government. This mechanism helps deduct tax at the time of generation or organization of income. It helps the taxes to be deducted by the payer and the same is directly remitted to the Government by the payer on the payee’s behalf.
When is tax deduction applicable?
A taxpayer or deductor should deduct TDS if the amount of interest credited or paid is likely to be credited in a financial year.
Where the amount exceeds Rs 40,000, the TDS will be applicable for payers such as cooperative societies participating in the lending business, post offices (if the Central Government notifies to make deposits), or lending institutions.
If any senior citizen earns interest up to Rs 50,000 from 2018-19 FY then no TDS will be applicable.
What types of interests are exempted under Section 194A?
No tax is required to be deducted if the aggregate amount of interest paid or credited to the payee in respect of the time deposit does not exceed the following threshold limit during the financial year:
|Payer||Threshold limit if Payee is|
|Co-operative Society engaged in banking business||50,000||40,000|
|In any other case||5,000||5,000|
In the above table the “time deposits” means deposits that include recurring deposits that are repayable at the expiry of fixed periods.
Certain interest income is exempted from TDS under Section 194A, such as –
- interest on Income tax refund,
- interest earned on a Saving bank account,
- interest paid to any bank, LIC, financial institution, or insurance company,
- interest paid by a partnership firm to a partner,
- interest paid by the co-operative society to any member or another co-operative society. (However, if the co-operative society last year’s turnover was more than Rs. 50 Crores, then TDS will be deducted, where an interest paid to senior citizens is more than Rs. 50,000 and Rs. 40,000 in other cases).
- interest does not exceed Rs. 40,000 where the payer is any bank, banking company or institution, post office, or cooperative society engaged in the banking business.
Who is responsible to deduct TDS?
A person who makes payment on interest, other than a security interest, will be liable to deduct TDS if all the conditions mentioned under Section 194A are fulfilled.
The following people are required to pay TDS –
Any person including members of Hindu Undivided Families (HUFs) that are eligible to audit tax under Section 44AB in the past financial year (FY) and all other assessees such as company, partnership firm, Body of Individuals (BOI) and Association of Persons (AOP) are responsible to deduct TDS.
Any individual or a HUF who exceeds Rs 1 Crore annual turnover in business and a professional whose annual turnover exceeds Rs. 50 Lakh during the financial year when such interest is credited or paid.
When must TDS be deducted under Section 194A?
Under Section 194A, the tax is to be deducted at the time of payment or credit of interest to the payee’s account, whichever is earlier. So, in case the interest is credited to the payee’s account in March 2022, and the same is paid in May 2022. Here, the time of credit is March 2022 and the time of payment is May 2022, therefore, the liability to deduct tax will arise in March 2022.
The time limit for depositing TDS for April – February is on/before the 7th of the following month. For March, the TDS should be deposited on/before 30th April.
So, suppose you are deducting tax on 25th April then, it must be deposited on/before 7th March, and tax deduction for 15th March would be on/before 30th April.
In case, the TDS is not deducted, then an interest of 1% per month will apply from the due date to the actual date of deduction.
In case of late payment, an interest of 1.5% per month will apply from the due date to the actual date of deduction.
What is the rate of TDS under Section 194A?
The rate of TDS under Section 194A is 10% if the payee provides the PAN. However, due to COVID-19, the government has provided relief by reducing the interest rate to 7.5% for interest credited from 14th -31st March 2021.
If the payee does not furnish the PAN, then a 20% tax rate will be applicable.
The tax is deducted at the basic rate and no surcharge, or education cess will be added to the given rate.
Which TDS return has to be filed under Section 194A?
To report TDS on all payments such as interest payments, rent, professional fees, commission, royalty, brokerage, etc. except salary the deductors have to file a quarterly statement under Form 26Q.
Is TDS on interest deducted by the payer?
Yes, every payer other than an individual or a Hindu Undivided Family, who is responsible to pay interest except interest on securities to a resident will be liable to deduct tax at source under Section 194A.
Is Section 194A applicable to non-residents?
No, Section 194A applies only to residents. Payment of interest to a non-resident is covered under Section 195.
Is interest from savings banks subject to TDS under 194A?
NO, interest on saving bank is not subject to TDS under Section 194A, only recurring deposit interest and fixed deposit are covered under this section.
TDS on interest other than on securities is covered under Section 194A of the Income Tax Act. A tax is deducted under Section 194A if interest is paid to a resident, other than interest on securities. This section does not apply to non-residents. Every person except an individual or HUF who is responsible to pay interest to a resident (other than interest on securities) is liable to deduct tax at source as per Section 194A. An individual or a HUF will be liable to deduct taxes as per Section 194A if their gross receipts, total sales, or turnover from the profession or business carried out by them exceeds Rs. 50 Lakhs (in case of profession) or Rs. 1 Crore (in case of a business) for the preceding financial year when the said amount is paid or credited. Under Section 194A, the tax must be deducted at the time of payment or credit of interest to the payee’s account.