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Practical aspects of the provisions of Section 194 A of the IT act

CA Mehul Thakker 
on 31 January 2018


In this article, we will be touching upon the provisions of the Income Tax Act, 1961 relating to TDS in case of purchase of Immovable property.

Moving forward, the readers shall consider following practical situation for the effective understanding of the provisions of section 194 A of the Act.

Practical Scenario: 1

Mr. Intelligent has made following fixed deposits with different branches of Bank.

(a) Rs. 1,00,000 @7.5% with Nariman Point Branch
(b) Rs. 1,00,000 @7% with Prabha Devi Branch
(c) Rs. 1,00,000 @7.25% with Matunga Branch

Advise Bank with regard to TDS obligation under following alternatives:

Alternative (a): Bank has not adopted core banking solutions.
Alternative (b): Bank has adopted core banking solutions.

Before we reach to the solution of the above-mentioned practical issue, let's comprehend the provisions of section 194A(3) of the Act.

By virtue of section 194A(3), tax is not deductible where the aggregate amount of interest credited or paid or likely to be credited or paid during the financial year does not exceed Rs.10,000 where the payer is a banking company.

The aforesaid limit of Rs.10,000 shall be computed with reference to the income credited or paid by a branch of the baking company or the cooperative society, as the case may be.

The benefit of branch-wise limit of Rs. 10,000 shall not be available w.e.f. 01-06-2015 where such banking company or the co-operative society, as the case may be has adopted core banking solutions.

Solution to Practical No. 1

Alternative (a): Bank has not adopted core banking solutions.
Bank is not required to deduct TDS since the interest payable at each branch does not exceed Rs. 10,000.

Alternative (b): Bank has adopted core banking solutions.
Since aggregate interest payable to Mr. Intelligent exceeds Rs. 10,000, bank is under an obligation to deduct TDS.

Practical Scenario: 2

Examine the TDS obligation in respect of following payments:

(a) On 31st March, 2018, Jay Ambe credit co-operative society credited Rs. 12,000 interest on fixed deposit made by Ms. Gita, a member of such society.

(b) On 31st March, 2018, Jay Ambe credit Co-operative society credited Rs. 13,000 interest on fixed deposit made by Jay Madi Farmer's Co-operative society, a member of former society.

(c) On 31st March, 2018, Kalupur Co-operative Bank credited Rs. 14,000 interest on fixed deposit made by Mr. Bablu, a member of such bank.

Before we reach to the solution of the abovementioned practical issue, let's comprehend the provisions of section 194A(3) of the Act.

By virtue of section 194A(3), tax is not deductible:

(1) Where interest is credited or paid by a co-operative society (Other than Co-operative Bank) to its members ;
(2) Where interest is credited or paid by co-operative society to any other co-operative society.

Solution to Practical No. 2

(a) Jay Ambe Credit Co-operative Society is not required to deduct tax at source since it has been credited to the account of Ms. Gita, being member of such society.

(b) Jay Ambe Credit Co-operative Society is not required to deduct tax at source since it has been credited to the account of Jay Madi Farmers' Co-operative Society, being member of former society.

(c) Kalupur Co-operative Bank is required to deduct tax at source while crediting interest to the account of Mr. Bablu even though he is a member of this Bank.

Practical Scenario: 3

Mr. Ramesh opened recurring deposit account with State Bank of India. Manager, SBI wants to deduct tax at source under section 194A on interest component Rs. 12,000. Mr. Ramesh objected tax deduction on the ground that recurring deposit is not covered within the meaning of “Time deposit” for the purpose of section 194A. Discuss the validity of objection raised by Mr. Ramesh.

Before we reach to the solution of the abovementioned practical issue, let's comprehend the provisions of section 194A(3) of the Act.

By virtue of section 194A(3), tax is not deductible where interest is credited or paid in respect of deposits with a banking company or with a co-operative society engaged in carrying on the business of banking. However, interest paid on time deposits is subject to tax deduction at source;

The expression "time deposit" has been defined to mean deposits, including recurring deposits, repayable on the expiry of fixed period.

Considering the definition of time deposit, tax is required to be deducted on interest on recurring deposits by the Manager, SBI, if the aggregate of interest payable exceeds Rs. 10,000.

Therefore, the contention raised by Mr. Ramesh objecting tax deduction at source is not valid.

Click here to enroll Practical Aspects of Tax Deduction and Collection at Source under Income Tax Act course by the author.


Tags : Income Tax

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