The various sections under the Income Tax Act, Section 194A is specifically distinct because it focuses on the Tax Deduction at Source (TDS) on interest income, excluding interest on securities. This section plays an essential role in ensuring that tax on interest income is collected at the source itself, thus preventing tax evasion.
What is Section 194A?
Section 194A of the Income Tax Act pertains to the deduction of TDS (Tax Deducted at Source) on interest other than interest on securities. This includes:
- Interest on Fixed Deposits
- Interest on Loans
- Interest on Advances (other than those provided by banks)
The purpose of Section 194A is to ensure that tax is collected at the source of income, promoting better tax compliance and reducing evasion.
Who deducts TDS under Section 194A of the Income Tax Act?
The payer/deductor is required to deduct TDS according to section 194A:
- An individual or a Hindu Undivided Family provided that their sales/gross receipts/turnover from business or profession exceeds Rs. 1 crore(in case of a business) and Rs. 50 lakhs in case of services. Other individuals and Hindu Undivided Families are exempted from these provisions of Section 194A of the Income Tax Act.
- 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) other than an individual and HUF subject to certain conditions.
When does TDS Under Section 194A Need to be Deducted?
The payer/deductor shall deduct TDS if the amount of such interest paid or credited or is likely to be paid or credited in a financial year, exceed
40,000 where the payer is
- Banking company or any bank or a banking institution
- Co-operative society engaged in the business of banking
- Post office (on deposit under scheme framed and notified by Central Government).
5,000 in any other case
- From FY 2018-19 onwards no TDS will be deducted on interest earned upto INR 50,000 by senior citizens. The interest amount should be earned from the following:
- Deposits with banks;
- Deposits with post offices
- Fixed deposit schemes
- Recurring deposit schemes
What are the rates of TDS?
Following are the rates at which TDS is to be deducted under the current government regulations:
Standard TDS Rate: 10% TDS is deducted if the recipient provides a PAN; otherwise, TDS is applied at 20%.
- Thresholds for TDS Deduction:
- For nonbank entities: TDS applies only if interest income exceeds ₹5,000.
- For banks, cooperative societies offering banking services, and post offices: TDS applies if interest income exceeds ₹40,000 (₹50,000 for resident senior citizens).
- Other Regulations:
- No additional surcharges or education taxes apply to these TDS rates.
- Example: For a bank interest payment of ₹80,000 to a PANholding customer, 10% TDS is deducted and credited to the customer’s account regardless of withdrawal.
When is Tax deducted at NIL Rate or Lower Rate?
When a declaration is submitted in form 15G/15H u/s 197A
If a declaration is submitted under Section 197A by the recipient to the payer along with his/her PAN, then no tax is deductible if the following conditions are satisfied:
- Recipient is a person other than a company or firm
- Tax on total income of the Financial year (FY) is NIL
- Total income does not exceed the exemption limit (i.e. for AY 2024-25, Rs.2,50,000 or Rs.3,00,000 or Rs.5,00,000, as applicable). This condition is NOT applicable if the recipient is a resident senior citizen.
- Such a declaration shall be given in duplicate form 15G (15H for senior citizens). In case of Senior Citizens Saving Scheme, 2004 (SCSS), investors can submit the declaration.
- Nominees of investors of SCSS can also produce the declaration at the time of payment after the death of the depositor.
- On submission of declaration to the bank, bank shall not deduct tax (subject to the conditions) on payment of interest.
When an application is submitted in Form 13 under Section 197
- As per provisions of Section 197, the recipient can apply in Form no.13 to the Assessing Officer to get a certificate authorizing the payer to deduct tax at lower rate (or deduct no tax, if certain conditions are satisfied).
- There is no time limit for application and it can be filed at any time before actual deduction of tax. If the recipient does not have PAN, he cannot apply for the certificate.
- The certificate shall be issued, directly to the person responsible for paying income, under an advice to the applicant.
- The certificate cannot be issued with retrospective effect. It shall have a validity from the date of issuance till the end of the Financial Year. It won’t be issued for multiple FYs.
- The recipient may furnish copy of such certificate to
What are the Exemptions From 194A TDS Section of Income Tax Act?
Section 194A of the Income Tax Act governs the deduction of Tax Deducted at Source (TDS) on interest other than interest on securities. Here are some key exemptions under this section:
- Interest earned on savings bank accounts is exempt from TDS.
- Interest on income tax refunds is exempt from TDS.
- Interest paid by a partnership firm to its partners is exempt from TDS.
- Interest paid to banks, Life Insurance Corporation (LIC), Unit Trust of India (UTI), or insurance companies exempt from TDS.
- Interest paid by cooperative societies to their members or other cooperative societies exempt from TDS.
Additionally, if a declaration is submitted in Form 15G/15H under Section 197A, no tax is deductible if certain conditions are met, such as the recipient being a person other than a company or firm and their total income not exceeding the exemption limit.
FAQs
What is the time limit for depositing TDS collected under section 194A?
TDS collected in March shall be deposited to the government by the 30th of April, and for the rest of the months, i.e., from April to Feb, TDS collected shall be deposited by the 7th of the next month
Is TDS applicable on saving account interest?
As per the Income Tax slab rates, which apply to the investor, the interest earned on a savings account is taxable. TDS on saving interest is not deducted under section 194A as in the case of FDs and Term Deposits, whereas under section 80TTA, deduction on savings account is allowed with a maximum of Rs. 10,000 per year.
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