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Section 194A of Income Tax Act

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August 23, 2022

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9 mins read

Section 194A of Income Tax Act – TDS on Income from Interest, other than interest on Securities

Serial No. Contents
1. Introduction on Section 194A of Income Tax Act
2. Who is liable to deduct TDS under Section 194A ?
3. When is TDS deducted under Section 194A ?
4. Can TDS be deducted at NIL Rate or Lower Rate ?
5. Verbatim of Section 194A

Introduction of Section 194A of Income Tax Act

Section 194A of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) deals with deduction of TDS on interest earned from sources, other than on securities. It includes Interest on Fixed Deposits, Interest on time Deposits, Interest on Loans and Advances, Bank Deposits, etc. This section is applicable only on a Resident. In case such income is earned by a non-resident, then provisions of Section 194A will not be applicable on interest payments made to a non-resident. Such transactions shall be covered under Section 195 of the Act.

This article covers aspects which fall under Section 194A, i.e. payment of interest earned from sources other than securities made to Residents. Let’s take a closer look at Section 194A.

Who is liable to deduct TDS under Section 194A?

The persons who are responsible to deduct tax at source on interest, other than interest on securities to a resident person are as follows:

  • Any person, other than Individual or HUF;
  • An individual or a HUF, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed Rs. 1,00,00,000 in case of business or Rs. 50,00,000 in case of profession during the financial year immediately preceding the financial year in which such interest is credited or paid.

No tax shall be deducted at source if total interest payable does not exceed Rs. 5,000.

When is TDS Deducted under Section 194A of Income Tax Act?

The provisions of Section 194A are triggered when payment of interest earned from sources other than securities which are made to Residents are above Rs. 40,000 in a year (this limit is stands to Rs. 50,000 if the resident falls under the category of ‘Senior Citizen’ in certain cases). The various payments that fall under this category are:

  • 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 Financial Year 2018-2019 onwards the annual limit for Senior Citizens have been increased to Rs.50,000 in case such income of interest has been earned from the below mentioned assets:

  • Deposits with banks;
  • Deposits with post offices
  • Fixed Deposit schemes (FDs)
  • Recurring Deposit schemes (RDs)

Example 1: If the interest on fixed deposit paid by ABC Bank to Mr. A is Rs. 60,000 in a given Financial Year, then the amount of TDS to deducted before such payment is Rs. 6000 (i.e. 10% of 60,000).

Example 2: If the interest paid on fixed deposit by ABC Bank to Mr. B, who is a Senior Citizen, is Rs. 45,000 in a given Financial Year, then no TDS shall be deducted before such payment of interest.

Can TDS be deducted at NIL Rate or at a Lower Rate?

As per the provisions of Section 194A, the rate of deduction of TDS is 10%.  However, one can take advantage of the below mentioned concessions:

  1. NIL Rate

For taking advantage of such concession, one has to file a declaration and submit it in Form 15G/15H under Section 197A. This has to be supplemented by the conditions mentioned below:

  • The Payee is a person other than a company or a firm.
  • The tax on income of the Previous Year (PY) is NIL.
  • Total income for the year does not exceed beyond the exemption limit (however, this condition is not applicable in case of a Senior Citizen).
  • Declaration must be submitted in Form 15G (Form 15H for Senior Citizens). In case interest is from a SCSS (Senior Citizen Saving Scheme), investors can submit the declaration.
  • On submission of such declaration, the bank shall not deduct TDS on such transaction at the time of such payment.
  1. Lower Rate

If the taxpayer wishes to have his TDS deducted at a lower rate, then the recipient can apply in Form 13, under the provisions of Section 197 of the Act to the Assessing Officer. The AO may givea certificate authorizing the payer to deduct income tax at a lower rate (or deduct no tax, if the conditions are satisfied). There is no time limit for such filing and can be filed at any time before such deduction.

However, if the taxpayer does not have a PAN Card, then he cannot apply for such certificate.

The taxpayer shall furnish such certificate to the payer responsible for paying the interest so as to direct him to deduct TDS at a lower rate or at NIL rate. No surcharge, cess or SHEC shall be charged on such TDS.

Note: In case the taxpayer does not possess a valid PAN, the rate of deduction shall be 20%.

Verbatim of Section 194A of Income Tax Act

For the verbatim of Section 194A of Income Tax Act, find the link attached below;

Click here for the Verbatim of Section 194A

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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