Know all about TDS on Interest Section 194A
Tax deduction at source is a means of collecting tax on income, dividends or asset sales, by requiring the payer to deduct tax due before paying the balance to the payee. In India, under the Indian Income Tax Act of 1961, income tax must be deducted at source as per the provisions of the Income Tax Act, 1961. In this article we will discuss Tax deducted at source on interest other than securities. Section 194A deals with the scheme of deduction of tax at source from interest other than interest on securities.
When does section 194A TDS on Interest other than securities applies?
Section 194A applies only to interest, other than “interest on securities”, credited or paid by any assessee or an individual or HUF whose total sales, gross receipts or turnover from the business or profession carried on by him exceed Rs. 1 crore or 50 Lakhs respectively during the immediately preceding financial year in which such interest is credited or paid, shall be liable to deduct income-tax under this section. These provisions apply only to interest paid or credited to residents.
TDS on interest on securities is covered under section 193 read more about the article here:
When does section 194A TDS on Interest other than securities does not applies?
No deduction of tax shall be made in the following cases:
1. If the aggregate amount of interest paid or credited during the financial year does not exceed Rs. 5000. This limit is Rs. 40000 in respect of interest paid on time deposits with a banking company, time deposits with a co-operative society engaged in banking business; and deposits with post office under notified schemes. The limit shall be increased to Rs. 50,000 in case of Senior citizen.
2. Interest paid or credited by a firm to any of its partners;
3. Income paid or credited 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;
4. Interest paid or credited in respect of deposits under any scheme framed by the Central Government and notified by it in this behalf;
5. Interest income credited or paid in respect of deposits (other than time deposits made on or after 1.7.1995) with:
a) A bank to which the Banking Regulation Act, 1949 applies; or
b) A co-operative society engaged in carrying on the business of banking
6. Interest credited or paid in respect of deposits with primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank.
7. Interest credited or paid in respect of deposits (other than time deposits) with a co- operative society, other than a co-operative society or bank referred to in (f) above, engaged in carrying on the business of banking.
8. Interest income credited or paid by the Central Government under any provisions of the Income-tax Act, 1961, the Estate Duty Act, the Wealth-tax Act, 1957, the Gift-tax Act, the Companies (Profits) Surtax Act or the Interest Tax Act.
9. Interest paid or credited to the following entities:
- Banking companies, or co-operative societies engaged in the business of banking, including co-operative land mortgage’ banks;
- Financial corporations established under any Central, State or Provincial Act.
- The Life Insurance Corporation of India.
- Companies and co-operative societies carrying on the business of insurance.
- The Unit Trust of India; and
- Notified institution, association, body or class of institutions, associations or bodies (National Skill Development Fund and Housing and Urban Development Corporation Ltd.(HUDCO) has been notified by the Central Government for this purpose)
10. Income credited by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal;
11. Income paid by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income paid during the financial year does not exceed Rs. 50,000.
12. Income paid or payable by an infrastructure capital company or infrastructure capital fund or public sector company or scheduled bank in relation to a zero coupon bond issued on or after 1.6.2005.
13. CBDT has, vide Circular No.3/2010 dated 2.3.2010, clarified that Explanation to section 194A will not apply in cases of banks where credit is made to provisioning account on daily/monthly basis for the purpose of macro monitoring only by the use of Core-branch Banking Solutions software.
What are the manner and rate of deduction of TDS?
A. Manner of deduction of TDS:
The deduction of tax must be made at the time of crediting such interest to the payee or at the time of its payment in cash or by any other mode, whichever is earlier.
Where any such interest is credited to any account in the books of account of the person liable to pay such income, such crediting is deemed to be credit of such income to the account of the payee and the tax has to be deducted at source. The account to which such interest is credited may be called “Interest Payable account” or “Suspense account” or by any other name.
B. Rate of TDS:
The rate at which tax is to be deducted is 10% both in the case of resident non-corporate assessee and domestic companies.
Understanding with examples:
On 1.10.2019, Mr. X, aged 40 years, made a six-month fixed deposit of Rs 10 lakh at 9% p.a. with ABC Co-operative Bank. The fixed deposit matures on 31.3.2020.
In the given case ABC Co-operative Bank has to deduct tax at source@10% on the interest of Rs. 45,000 (9% × Rs. 10 lakh × 6month /12month) under section 194A. The tax deductible at source under section 194A from such interest is, therefore, Rs. 4,500.
On 1.6.2019, Mr. Y, aged 45 years, made three nine month fixed deposits of Rs. 3 lakh each carrying interest at 9% with XY Branch, AB Branch and CD Branch of XYZ Bank, a bank which has adopted Core-branch Banking Solutions. The fixed deposits mature on 28.2.2020.
XYZ Bank has to deduct tax at source at 10% under section 194A, since the aggregate interest on fixed deposit with the three branches of the bank is Rs. 60,750 [Rs.3,00,000 × 3 × 9% × 9/12], which exceeds the threshold limit of Rs. 40,000. Since XYZ Bank has adopted Core-branch Banking Solutions, the aggregate interest credited/paid by all branches has to be considered. Since the aggregate interest of Rs.60,750 exceeds the threshold limit of Rs.40,000, tax has to be deducted@10% under section 194A.