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The article presented to show the TDS provisions contained under section 194A of the Income Tax Act, 1961 relating to the TDS deduction on Interest other than interest on securities.

Introduction of Section 194A

This section of Income Tax, 1961 contains the provisions relating to deduction of TDS on Interest other than interest on securities. For example TDS to be deducted on interest received/paid on Fixed deposit or loan and advances.

Who are liable to deduct tax at source?

Any person (not being an individual / HUF), responsible for paying to a resident any income by the way of interest other than interest on securities, is responsible to deduct TDS u/s 194A and deposit the same to the Government Treasury in the form of filing of TDS return within the time stipulated.

On which payment TDS is required to be deducted

TDS is required to be deducted under this section where payment is made as a interest to any resident person (u/s 6).Thus the provisions of section 194A is not applicable on payment made to any non resident person. Payments made to non-residents are also covered under TDS mechanism, however, tax in such a case is to be deducted as per section 195.

Rate of TDS interest

As per section 194A read with Part II of First Schedule to Finance Act, tax is to be deducted @ 10% from the amount of interest. However, if the payee does not furnish his Permanent Account Number (PAN), then the payer has to deduct tax at the higher of following:

  1.  At the rate specified in the relevant provision of the Income-tax Act.
  2.  At the rate or rates in force, i.e., the rate prescribed in the Finance Act.
  3.  At the rate of 20%.

Note: No surcharge, education cess or SHEC shall be added to the above rates. Hence, the TDS will be deducted at the basic rate.

Deducting TDS under Section 194A

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, exceeds

Rs. 40,000 where the payer is

  1. A banking company or any bank or a banking institution
  2. Co-operative society engaged in the business of banking
  3. Post-office (on deposit under a scheme framed and notified by Central Government).
  4. 5,000 in any other case
  5. From FY 2018-19 onwards TDS will not be deducted on interest earned upto Rs.50,000 by senior citizens. The interest amount should be earned from the following:
    • Deposits with banks
    • Deposits with post-office
    • Recurring deposit scheme
    • Fixed deposit schemes

Time limit for depositing TDS under section-194A

The time limit for depositing TDS under Section 194A is listed below:

TDS deducted during the month of April to June is to be deposited on or before the 7th of next month. Tax Deducted in the month of March is to be deposited on or before the 30th of April.

  • For e.g., tax deducted on 25th April is to be deposited on or before 7th May and tax deducted on the 15th march is to be deposited on or before 30th of April.

Tax deducted at NIL rate or lower rate

Tax deduction at Nil or lower rate happens under the following scenarios:

When a declaration is submitted in form 15G / 15H u/s 197A :-

If a declaration is submitted u/s 197A by the recipient to the payer along with his / her PAN, then no tax is deductible if the following conditions are satisfied:

  • A recipient is a person other than a company OR firm
  • Tax on total income of the previous year is NIL
  • Total income should not exceed the exemption limit (i.e., for AY 2016-17, Rs.2,50,000 or Rs.3,00,000 or Rs.5,00,000, as applicable). This condition is NOT applicable (NA) if the recipient is a resident senior citizen.
  • Such a declaration shall be given in duplicate form 15G (15H for senior citizens). In the 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, the bank shall not deduct tax (subject to the conditions) on payment of interest.

Interest for delay in payment of TDS

As per section 201, if any person who is liable to deduct tax at source does not deduct tax at source, or after so deducting fails to pay the whole or any part of the tax to the credit of the Government, then such person shall be liable to pay simple interest at following rates:

  • Interest shall be levied @ 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted. Interest shall be levied @ 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid to the credit of the Government. In other words, interest will be levied @ 1% for delay in deduction and @ 1.5% for delay in payment after deduction.

Issuance of TDS certificate

Every deductor has to furnish a TDS certificate to the deductee in Form No. 16A (for tax deducted on payments other than salary). The certificate should be issued on quarterly basis by following dates:

Quarter

Due date for Non-Government deductor

April to June

15th August

July to September

15th November

October to December

15th February

January to March

15th June

Default in any prescribed procedure

The deductor will be liable to penalty/persecution in respect of following defaults:

1. Default in obtaining Tax Deduction Account Number,
2. Default in deduction of tax,
3. Default in payment of tax to the credit of the Government ,
4. Default in furnishing the TDS return,
5. Default in furnishing the TDS certificate to the payee.

As per section 203A(1), every person liable to deduct tax at source has to obtain Tax Deduction Account Number (TAN), except person liable to deduct tax under section 194IA i.e. TDS on purchase of land/building and such person, as may be notified by the Central Government in this behalf.

When no tax is to be deducted?

Following are few important instances in which there is no requirement of deduction of tax at source under section 194A.

No tax is to be deducted if the aggregate amount of interest during the financial year does not exceed Rs. 5,000.

However, the limit of Rs. 5,000 will increase to Rs. 40,000 (Rs. 50,000 in case of Senior Citizen) in case of interest paid/payable by banking company on time deposit or a co-operative society carrying on banking business on time deposit and in case of interest paid/payable by post office on deposit made under Senior Citizens Saving Scheme Rules, 2004. The limit of Rs. 5,000 will be increased to Rs. 50,000 in case of Interest on compensation awarded by Motor Accident Claims Tribunal.

For the above purposes "time deposits" means deposits including recurring deposits repayable on the expiry of fixed periods.

It should be noted that interest on time deposits/deposits with a public company eligible for deduction under section 36(1)(viii) shall be computed with reference to the income credited or paid by the banking company or the co-operative society or the public company, as the case may be, where such entity has adopted core banking solutions.

Apart from above discussed instances, few other instances where no tax is to be deducted are as follows: 

  • Interest paid to any banking company to which the Banking Regulation Act, 1949, applies, or any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank). 
  • Interest paid to any financial corporation established by or under a Central, State or Provincial Act. 
  • Interest paid to the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956. 
  • Interest paid to the Unit Trust of India established under the Unit Trust of India Act, 1963. 
  • Interest paid to any company or co-operative society carrying on the business of insurance. 
  • Interest paid to any other institution, association or body or class of institutions, associations or bodies which the Central Government may notify. [As amended by Finance Act, 2019] 
  • Interest paid by a co-operative society (other than a co-operative bank) to a member thereof or to such income credited or paid by a co-operative society to any other co-operative society. 
  • Interest credited or paid in respect of deposits notified by the Central Government. Interest credited or paid in respect of deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank. 
  • Interest credited or paid by the Central Government under any provision of Income-tax Act, 1961 or Wealth-tax Act, 1957. 
  • Interest which is paid or payable by an infrastructure capital company or infrastructure capital fund or a public sector company or scheduled bank in relation to a zero coupon bond issued on or after the 1st day of June, 2005. 
  • Interest paid by special purpose vehicle to business trust as given in section 10(23FC) [from 1-10-2015].
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