Section 194A: TDS on Interest other than Interest on Securities

Section 194A of the Income Tax Act addresses Tax Deducted at Source (TDS) on interest payments other than Interest on securities. These payments are a significant part of banking, investment markets, and personal savings in India.

Section 194A of the Income Tax Act mandates TDS deduction on any payments which constitute Interest i.e. TDS on interest. Under this section, the person, other than an individual or Hindu Undivided Family (HUF), responsible for paying commission must deduct tax at the rate of 10%.

Individuals and Hindu Undivided Families (HUFs) required to undergo a tax audit under Section 44AB of the Income Tax Act (due to a business turnover exceeding Rs. 1 crore or professional income exceeding Rs. 50 lakhs) must also deduct TDS on Interest payments under Section 194A of Income Tax Act, even if the payment amount might normally not require TDS deduction under Section 194A. Interest payments to Non-Resident Indians (NRIs) are not covered under Section 194A of the Income Tax Act. Instead, TDS on such payments is governed by Section 195.

Threshold for deducting TDS on Interest payments under Section 194A of Income Tax Act-

Threshold for deducting TDS on Interest payments under Section 194A of Income Tax Act on interest payments is determined by the payer and the amount.

₹40,000 Limit: TDS on interest is deducted if interest paid or credited (or expected to be) in a financial year exceeds ₹40,000 when the payer is a:

• Banking company or any bank or banking institution
• Co-operative society engaged in banking
• Post office (on deposits under schemes notified by the Central Government)

₹5,000 Limit: In all other cases, the TDS on interest limit is ₹5,000.

Senior Citizen Exemption: Since the 2018-19 financial year, no TDS on interest is deducted on up to ₹50,000 in interest earned by senior citizens from:

• Bank deposits
• Post office deposits
• Fixed deposit schemes
• Recurring deposit schemes

Exemptions of TDS on Interest Payment under Section 194A of the Income Tax Act-

Section 194A of the Income Tax Act covers TDS on interest income other than interest on securities. However, several types of interest payments are exempt from TDS under section 194A, including:

• Interest earned on savings bank accounts.
• Interest on income tax refunds.
• Interest which is paid by a partnership firm to its partners.
• Interest paid to banks, the Life Insurance Corporation (LIC), the Unit Trust of India (UTI), or insurance companies.
• Interest which is paid by cooperative societies to their members or other cooperative societies.

Rate of TDS deduction on Interest Payments under Section 194A of the Income Tax Act-

The rate of TDS on interest deduction on Interest Payments under Section 194A of the Income Tax Act is 10% when the recipient provides their Permanent Account Number (PAN).

However, if the recipient does not provide their PAN, the TDS on interest rate increases to 20%.

Lower Rate of TDS deduction on Interest Payments under Section 194A of the Income Tax Act-

Section 197 of the Income Tax Act allows taxpayers to request a certificate for a lower or zero TDS rate on their income, including interest income. This is helpful when the standard TDS rate is higher than your actual tax liability. To obtain this certificate, you must submit Form 13 to your Assessing Officer (AO). The AO will review your income and estimated tax liability, and if approved, will issue a certificate specifying the reduced or nil TDS rate applicable for the financial year.

Form 15G/15H-

To avoid TDS on Interest payments under Section 194A of Income Tax Act, individuals who believe their total income falls below the taxable limit can submit Form 15G (for those under 60) or Form 15H (for senior citizens) to the payer. This self-declaration informs the payer that TDS on interest deduction is not necessary, provided the conditions are met.

Time Limit to Deposit TDS on interest deducted on Interest payments under Section 194A of the Income Tax Act-

The time limit for depositing TDS deducted on Interest services payments under Section 194A of Income Tax Act generally falls on the 7th day of the month subsequent to the month when the TDS was deducted. This means, TDS on interest deducted in June should be deposited by July 7th. However, an exception is made for TDS on interest deducted in March, which should be deposited by April 30th.