Section 194A of Income Tax Act, 1961, deals with the deduction of tax at source (TDS) on interest paid to residents. This section applies to all types of interest payments, except interest on securities. In simple terms, if you pay interest to someone, you may need to deduct some amount as tax and send it to the government.
Who Needs to Deduct TDS?
According to Section 194A of Income Tax Act, any person who is responsible for paying interest must deduct TDS at the applicable rate. The person who pays interest is called the payer, and the person who receives the interest is called the payee.
The rules apply mainly to businesses, companies, and non-individuals. If you are an individual or a Hindu Undivided Family (HUF), you will need to deduct TDS only if your business or professional turnover exceeds certain limits.
Are you interested in pursuing a career in Law? The Legal School in collaboration with IndusLaw has created unique programs for a Certification in Mergers & Acquisitions, Private Equity and Venture Capital Laws, and Certification in Mergers & Acquisitions for fresh law graduates as well as professionals looking to advance in their careers! Enquire now for details!
Who Does Not Need to Deduct TDS?
If you are a small business owner or an individual with income from interest less than the threshold limit, you do not need to deduct TDS.
An individual or HUF who has a turnover of less than ₹1 crore (business) or ₹50 lakh (profession) in the previous financial year is exempt from this rule.
When is TDS Deducted?
TDS is deducted when the interest is credited to the payee’s account or when the payment is made, whichever happens first. For example, if you are a company paying interest to a bank, you will deduct the tax when you credit the interest to the bank’s account or when you make the payment. It is important to deduct the tax at the right time to comply with the law.
Interest Subject to TDS Deduction
Interest paid on the following types of income is subject to TDS under Section 194A:
Interest on Fixed Deposits (FDs): If you have invested money in FDs, the bank will deduct tax from the interest earned.
Interest on Recurring Deposits (RDs): The interest paid on RD accounts is also subject to TDS.
Interest on Loans: If you borrow money and the lender is paying you interest, TDS may apply to that income as well.
What is the TDS Rate?
The rate at which TDS is deducted depends on various factors. The most common rate is 10%. This rate applies if the payee provides their Permanent Account Number (PAN) to the payer. However, if the payee does not provide a PAN, the rate of TDS is 20%.
If the payee is a senior citizen (aged 60 years or above), the limit for TDS deduction is higher, making it easier for them to earn interest without the deduction of tax.
Threshold Limits for TDS Deduction
Section 194A specifies certain thresholds for TDS deduction. This means that if the total interest paid to a person is below a certain amount, no TDS is required. The limits vary depending on the type of payer.
Banks and Cooperative Societies: The threshold for banks is ₹40,000. This means that if the interest paid by a bank is less than ₹40,000, no TDS will be deducted.
Other Payers: If the interest paid by anyone other than a bank or cooperative society is below ₹5,000, no TDS is required.
Special Rule for Senior Citizens
For senior citizens (those above 60 years of age), the limit is ₹50,000 for interest paid by banks and post offices. This allows senior citizens to earn a higher interest income without the burden of TDS.
Exemptions under Section 194A of Income Tax Act
While Section 194A applies to most interest payments, there are certain exemptions where TDS is not required:
Interest on Savings Accounts: The interest earned on savings bank accounts is not subject to TDS.
Interest on Tax Refunds: If the government refunds your taxes and pays interest, TDS will not be deducted on that interest.
Interest from Government Schemes: Some government schemes may be exempt from TDS.
How to Avoid TDS?
If your total income is below the taxable limit and you want to avoid TDS, you can submit a Form 15G (if you are below 60 years) or Form 15H (if you are a senior citizen) to the payer. These forms state that your income is below the taxable limit, and you are not required to pay any tax.
If you believe that you are entitled to a lower rate of TDS you can also apply for a lower TDS certificate from the Income Tax Department using Form 13.
Summing Up
Section 194A of Income Tax Act plays a crucial role in the collection of taxes on interest income. It ensures that tax is deducted at the source and paid to the government on time. For individuals, especially senior citizens, it provides relief by allowing higher limits for TDS deduction. By understanding the provisions of Section 194A, both payers and payees can ensure compliance with the tax laws and avoid unnecessary issues.
Related posts
Section 194A of Income Tax Act: FAQs
Q1. What is Section 194A of Income Tax Act?
Section 194A of the Income Tax Act requires the deduction of TDS on payments of interest other than interest on security, to residents.
Q2. Who shall deduct the TDS under Section 194A?
Any person who is not an individual or a Hindu Undivided Family (HUF), who makes interest payments, should deduct the TDS unless exempted.
Q3. What is the rate of TDS under Section 194A?
The overall TDS rate is 10%. In case the payee fails to furnish a PAN, the rate is raised to 20%.
Q4. Are there exemptions under Section 194A?
Yes, exemptions are available for interest on deposits under savings schemes, tax refund, and government schemes.
Q5. What are the threshold limits for TDS under Section 194A of Income Tax Act?
No TDS is deducted when the interest is less than ₹40,000 for banks and ₹5,000 for others. Senior citizens have a greater exemption of ₹50,000 for banks.
Q6. How do I avoid TDS deduction?
File Form 15G (for individuals under 60) or Form 15H (for senior citizens) if your income is less than the taxable limit.
