Section 194A - TDS on interest other than interest on securities

CA Himanshu Gandotra 
on 22 July 2019


Introduction

Now a day everyone puts their extra funds into such arrangement from which they can earn Interest income. For some people it is just additional or side income and for some it is Main source of Income to make living.

On such interest income earned, an amount of Tax has to be deducted by payer of Interest upfront (if certain conditions are met) and pay the remaining amount to Payee. This tax commonly called as TDS (Tax deducted at Source) is covered under Section 194A of The Income Tax Act,1961

Section 194A-TDS to be deducted by whom?

Under this section, liability to deduct tax falls on following persons:-

  • Any person other than Individual or HUF who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities
  • Individual or HUF if they fall under *Section 44AB(a) or 44A(b)

*Section 44AB(a) includes those Businesses whose Total turnover or gross receipts for a financial year exceeds Rs. 1 crores

And Section 44AB(b) includes those Professionals whose Total Gross Receipts for a financial year exceeds Rs. 50 Lakhs.

Section 194A-TDS to be deducted on which payment and when?

Under this section, when the specified person as defined above, pays Interest to a Resident person , other than INTEREST ON SECURITY, then the Payer shall deduct TDS at rates specified in force at the time of payment of Interest by Credit, Cash, Cheque, Draft or otherwise.

The word CREDIT has very interesting implication in this section. Suppose Interest to be paid by Specified person is not actually paid by Payer but instead credited to SUSPENSE a/c or INTEREST PAYABLE a/c or any other a/c, then also TDS need to be deducted and deposited to Government.

Rates of TDS applicable

S.No.

Payer

Threshold Limit

Rate Applicable

1.

Banking Company to which Banking Regulation Act 1949 applies

10,000

10%

2.

Co-operative Banks

10,000

10%

3.

Post office on deposits made with it

10,000

10%

4.

Any Other person

5,000

5%

5.

Banks or Co-operative bank or Post Office paying Interest to any person being a Senior Citizen (aged >60 years)

40,000

10%

In above case 1-3 and 5, the If Interest amount shall be computed branch wise. For Example, if Branch 1 of a bank pays Rs. 9000 as interest on Fixed deposits to Mr. A and Branch 2 pays Rs. 6000 as Interest on FD to Mr. A, then in such a case though total interest received by Mr. A is Rs. 15000 that is exceeding Rs. 10000, but since neither of the branch is paying more than Rs. 10,000, None of the 2 branches will deduct TDS in this case.

TDS u/s 194A not to be deducted in following cases:-

  1. When Receiver of Interest is:-
  • Banking Company
  • Any financial corporation established by or under a Central, State or Provincial Act, or
  • Life Insurance Corporation of India
  • Unit Trust of India
  •  Any company or co-operative society carrying on the business of insurance, or
  • Such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette;
  1. Interest is paid by Partnership firm to its partners.
  1. Interest paid by Co-operative society to its members or to any other co-operative society.

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