Overview of Section 194A of Income Tax Act, 1961

Income tax has to be paid on the total income received in the previous year by the assessee. As it happens, it might become difficult for the assessees like you to pay the entire tax at the time of filing return, which is generally filed at the end of the financial year. To ease the burden of assessees, Central Board of Direct Taxes (CBDT) provides for tax deduction at source on various occasions. It simply means that the tax payable on a particular income by you is deducted instead by the payer (‘deductor’; and you will be called ‘deductee’) before the income is credited (or paid) to you. It has two-fold benefits, firstly the assessee would not need to worry about paying taxes at the end of the year as they are already paid on your behalf by the deductor, and secondly, it increases tax compliance of general masses and makes it easier to claim tax refunds at the time of filing returns.

Section 192 to 194IB of the Income Tax Act, 1961 (IT Act), provides for tax deduction at source (TDS). It must be noted that not all incomes are/can be subjected to a deduction at source but only those that are specifically mentioned under the IT Act. Section 194A deals with TDS on ‘Interest’ other than ‘Interest on Securities’.

Table of Contents:

1. TDS on Interest under section 194A of the IT Act
2. Who is required to deduct TDS under section 194A?
3. When does TDS on interest income need to be deducted?
4. Rate and time of TDS deduction under section 194A
5. Exemptions from TDS on interest
6. Payment of Taxes to Government

TDS on Interest under section 194A of the IT Act

Interest is a kind of income and hence liable to an income tax deduction. Section 194A provides for TDS at the payment of interest other than interest on securities. The interest payments which comes under this section includes interest on loans and advances (not banks), interest on fixed deposits, interest on recurring deposits, etc. Further, this section talks only about deduction on interest income being paid to a resident and not a non-resident (section 195 of the IT act deals with it).

Therefore, this section comes into operation when interest is being paid in the nature of ‘interest other than interest on securities’ and the deductee is a resident. This application, though, is subject to the following conditions as mentioned hereunder. Further, it must be noted that his section imposes liability on the deductor and not so much on the deductee.  

Who is required to deduct TDS under section 194A?

Following persons are required to deduct TDS on interest under section 194A:

• Persons, other than individuals and Hindu Undivided Families (HUFs). Therefore it includes persons like Banks, Co-operative societies, Post office, etc.

• Individuals or  HUFs, whose

1. Total sales, or

2. Gross receipts, or  

3. Turn over from the business or profession carried on by them  

Exceeds monetary limits specified under clause (a) or clause (b) of section 44AB of the IT act during the previous financial year (financial year preceding the financial year in which income is credited to the deductee).

When does TDS on interest income need to be deducted?

TDS is needed to be deducted, as per the section, when the interest income is paid or credited:

• Exceeds forty thousand rupees (in case of senior citizens, resident who is of the age 60 or more, fifty thousand rupees) where -  

1. The payer is a banking company to which Banking Regulation Act, 1949 applies,

2. The payer is a Co-operative society engaged in carrying on the business of banking,

3. It is received on any deposit with post office under any scheme framed by the central government.

• Exceeds five thousand in any other case.  

Rate and time of TDS deduction under section 194A

Rate of the tax deduction is 10% of the interest paid in case PAN is furnished by the deductee and 20% in case the PAN is not furnished. Further, it will be deducted at basic rate i.e. no surcharges are levied.  

Like in the case of other taxes deducted at source, TDS on interest under section 194A is deducted at the time of payment of interest income or when it is credited to the account of the payee, whichever is earlier.

Exemptions from TDS on interest

After knowing ‘what is TDS on interest u/s 194A’, ‘who is liable to deduct this TDS’ and ‘when is the TDS deducted’, it is imperative to know the conditions under which TDS on interest is exempted.

• Interest income will not be liable to be deducted when it paid or credited to:

1. Any banking company to which the Banking Regulation Act, 1949 applies, or

2. Any co-operative society engaged in carrying on the business of banking, or

3. Any financial corporation established by or under a Central, State or Provincial Act, or

4. The Life Insurance Corporation of India, or

5. The Unit Trust of India, or

6. Any company or co-operative society carrying on the business of insurance, or

7. Such other institution, association or body which is as such notified by the Central Government.   

• TDS will not be deducted when the interest is paid or credited by a firm to its partner. As well as when a co-operative society pays to one of its members.

• Section 197

Form 13, under section 197, can be submitted to the assessing officer. On receipt of the form, the assessing officer may grant you a certificate which will entitle you to a lower rate of TDS. Such certificate will be addressed to the payer directly and there is no time limit to submit this form. Such grant of the certificate depends on the satisfaction of Assessing Officer (subject to rules) that considering your income you deserve a lower rate of tax deduction.

• Section 197A

Section 197A talks about general exception from TDS if a form 15G or 15H (for senior citizens) is submitted to the deductor/payer under it. Such form has to be submitted along with your PAN. You will be exempted if the following conditions mentioned hereunder is met:

1. Payee or recipient is a person (not being a company or a firm),

2. Tax on total income in the previous year is Nil i.e. total income of previous year does not exceed the exemption limit as prescribed by the finance act of the concerned year (exemption limit is expected to be increased to 5,00,000 p.a. for the financial year 2019-2020).

3. Such declaration has to be given in writing, in duplicate and verified as prescribed in form 15G or 15H.

4. Part II of the form will be filled by the person responsible for the payment of income.

After the receipt of the duly filled form, payer will not deduct TDS on the payment of interest (other than securities).

Payment of Taxes to Government

Person collecting TDS has to furnish the details to the Income Tax Department and pay the tax accordingly. Such details, among other things, will include the name of the payee, her PAN details, date and amount of deduction. Upon, receiving the details, the IT Department will update the form 26AS of the deductee.   

Government has been making continuous efforts towards simplifying the tax structure of the country. Despite that, it can pose a challenge to the uninitiated. Experts at MyAdvo can help simplify tax for you. Further, our team of trained lawyers and professionals can provide you with the best tax consultancy and advocacy. Contact MyAdvo to know more.  

Written by: Peeyush Agarwal

Dr. Ram Manohar Lohia National Law University, Lucknow (5th Year)