Section 194A of Income Tax Act

Explore the provisions of Section 194A of the Income Tax Act, which governs the deduction of TDS on interest income and the applicable rates for different types of interest payments.
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3 min
13-January-2025

The Government of India, through the Finance Act of 2020, amended the provisions of section 194A of the Income Tax Act, 1961. This alteration mandates the deduction of TDS on dividend income declared and disbursed by a domestic company exempt from income tax under section 10(34). This article will discuss in detail Section 194A of the Income Tax Act and its implications.

What is Section 194A of the Income Tax Act?

Section 194A of the Income Tax Act outlines provisions for the deduction of tax at source (TDS) on interest payments made to residents in India. It specifies that TDS is applicable solely to residents and does not extend to non-residents. Payments to non-residents are subject to TDS under Section 195 of the Income Tax Act. Essentially, Section 194A governs the taxation of interest payments to residents, while Section 195 governs the taxation of interest payments to non-residents.

Also read: Section 80D – Deductions for medical and health insurance

How much is the TDS deduction under Section 194A?

Under Section 194A of the Income Tax Act, Tax Deducted at Source (TDS) is applicable on interest (excluding interest on securities) if it exceeds Rs. 5,000 annually for non-banking entities or Rs. 40,000 for banks (Rs. 50,000 for senior citizens). The TDS rate is 10%, provided the recipient has furnished their PAN. If PAN is not available, the TDS rate increases to 20%. Ensure proper documentation to avoid higher deductions.

What are the provisions under Section 194A?

Below are the key provisions of Section 194A:

  • Entities other than Hindu Undivided Families (HUFs) and individuals are required to deduct TDS on interest payments to residents.
  • HUFs or individuals must deduct TDS if their receipts or turnover in the previous year exceed Rs. 1 crore for business or Rs. 50 lakh for a profession.

TDS rate chart

According to current government regulations, interest income recipients with a PAN card are subjected to a 10% TDS rate, whereas those without face a 20% rate. Entities other than banks must have income exceeding Rs. 5,000 for TDS to apply. Bank, cooperative society, or post office interest earners require income exceeding Rs. 40,000 (Rs. 50,000 for senior citizens) for TDS application.

Situation

TDS Rate

Minimum Income Limit for TDS

With PAN card

10%

Rs. 5000

Without PAN card

20%

Rs. 5000

Interest from Bank, Cooperative Society, or Post Office

10% (General), 20% (Senior Citizen)

Rs. 40,000 (General), Rs. 50,000 (Senior Citizen)


One must also note that no additional taxes such as education tax or surcharge tax are applicable to TDS deductions.

When should TDS be deducted under Section 194A?

TDS under Section 194A is deducted when interest income is paid by entities to residents. Entities other than Hindu Undivided Families (HUFs) and individuals must deduct TDS on interest payments to residents. However, HUFs or individuals are required to deduct TDS only if their receipts or turnover in the previous year exceed Rs. 1 crore for business or Rs. 50 lakh for a profession. Additionally, TDS is applicable when interest income exceeds Rs. 5,000, except when collected by banks, cooperative societies, or post offices, where it applies if income exceeds Rs. 40,000 (Rs. 50,000 for resident senior citizens).

TDS deductions on lower rate

Submitting Forms 15G/15H under Section 194A helps in reducing TDS deductions. However, meeting specific criteria is essential to completely avoid TDS deductions. These criteria include being an individual (not a company), having no tax liability on the total income in the previous year, the total income falling below the exemption limit, and providing the declaration directly to the bank. Compliance with these conditions ensures a streamlined process of minimising or avoiding TDS deductions on interest income.

When to deposit TDS under Section 194A?

TDS deducted under Section 194A must be deposited with the government by the 7th of the following month. For example, if TDS is deducted in January, it must be deposited by the 7th of February. This rule applies to most months, except for March, where the deadline is extended to 30th April. Timely deposit ensures compliance and avoids penalties or interest. Businesses and individuals liable to deduct TDS should maintain accurate records and adhere to deadlines to prevent legal or financial consequences.

Also, read: Income tax rebate under Section 87A

Who is responsible for deducting TDS under Section 194A?

Under Section 194A, any person or entity making payments of interest (excluding interest on securities) to a resident is liable to deduct TDS if the total interest exceeds the specified threshold. This includes banks, financial institutions, cooperative societies, individuals, and Hindu Undivided Families (HUF) if they meet the prescribed criteria. The liability to deduct TDS arises when the interest payment exceeds Rs. 5,000 annually for non-banking entities or Rs. 40,000 for banks (Rs. 50,000 for senior citizens).

Time limit for depositing TDS

The deadline for depositing TDS varies based on the month in which the tax is deducted. Tax deducted between April and February must be deposited by the 7th of the following month. However, tax deducted in March should be deposited by April 30th. For instance, if a banking institution pays a customer Rs. 15,000 on a fixed deposit, and the accumulated earnings exceed Rs. 10,000, the institution is required to deduct TDS at a rate of 10% from the interest amount.

Types of payments covered under section 194A

Section 194A covers various types of payments on which TDS is applicable. These include:

  • Interest on loans: TDS applies on interest paid to residents, excluding interest on securities.
  • Bank interest: Interest earned from fixed deposits, savings accounts, and other similar sources.
  • Interest on recurring deposits: Applicable to interest paid on recurring deposit accounts.
  • Interest on other financial instruments: Payments to individuals and non-banking entities.
  • Interest on corporate bonds: Interest paid on bonds issued by companies or institutions.

TDS is applicable if the total interest exceeds the prescribed limit.

What are the exemptions from 194A TDS Section of Income Tax Act?

There are various exemptions from TDS stipulated in Section 194A, including:

  • Interest payments made by cooperative societies to their members.
  • Interest payments to partners by partnership firms.
  • Interest payments to banking institutions, Life Insurance Corporation of India (LIC), Unit Trust of India (UTI), financial corporations, and other insurance companies in India.
  • Interest payments on specific government securities.
  • Interest payments on certain deposits made under the National Savings Scheme.

Explore: Tax benefits on health insurance

What are the penalties for Non-Compliance under Section 194A?

Failure to comply with Section 194A can lead to several penalties:

  • Interest on late payment: Interest is charged at 1.5% per month or part of the month for delay in depositing TDS.
  • Failure to deduct TDS: If TDS is not deducted at all, the payer faces a penalty of an amount equal to the tax that should have been deducted.
  • Late filing of TDS returns: Penalty of Rs. 200 per day until the return is filed, up to the amount of TDS due.
  • Non-issuance of Form 16/16A: Failure to issue TDS certificates to the payee can result in a penalty.

Procedure for deducting and depositing TDS under section 194A

Following are the procedures for deducting and depositing TDS under section 194A:

  • Deduction at source: TDS should be deducted at the time of making interest payments exceeding the threshold limit.
  • Furnishing PAN details: Ensure that the recipient provides PAN details to avoid higher TDS rates (20% without PAN).
  • Deposit TDS: Deposit the deducted TDS with the government by the 7th of the next month, or by 30th April for March.
  • Filing TDS returns: File quarterly TDS returns (Form 24Q) detailing the TDS deducted and deposited.
  • Issuance of TDS certificate: Provide Form 16A to the recipient for their tax records.

Section 194A of the Income Tax Act is significant in overseeing the deduction of tax at source (TDS) on interest income. For taxpayers and financial institutions, having a clear understanding of its provisions and exemptions is crucial to ensure compliance and streamline tax management. In addition to adhering to tax regulations, it is essential to focus on sound financial planning through measures like medical insurance. A well-structured medical insurance plan not only safeguards against unexpected healthcare expenses but also bolsters your overall financial approach. Staying updated on tax laws like Section 194A and investing in adequate medical insurance are key steps toward achieving financial security and peace of mind.

Read more: Section 115BAC of Income Tax Act: New Tax Regime

Frequently asked questions

What does Section 194A of the Income Tax Act cover?

Section 194A mandates the deduction of TDS on interest income, excluding interest on securities, paid by any person or entity to residents. This applies when the interest amount exceeds the specified threshold limits set under the Act.

What is the TDS threshold under Section 194A?

Under Section 194A, TDS is applicable if the total interest paid exceeds Rs. 5,000 for non-banking entities. For banks, the threshold is Rs. 40,000, or Rs. 50,000 for senior citizens. Interest payments below these amounts are exempt from TDS.

What is the TDS limit for banks under Section 194A?

For banks, the TDS threshold under Section 194A is Rs. 40,000 annually on interest payments. For senior citizens (aged 60 and above), the limit is increased to Rs. 50,000, above which TDS is deducted.

How is Section 194A defined?

Section 194A is defined as a provision under which TDS is deducted on interest income paid to residents. The article details the eligibility, payment thresholds, and the procedures for deduction, deposit, and filing, ensuring tax compliance.

What is the amendment in Section 194A?

The recent amendment to Section 194A increased the TDS exemption limits for senior citizens. The threshold for TDS on interest paid by banks is now Rs. 50,000 for senior citizens, up from Rs. 40,000, encouraging tax savings for senior citizens receiving higher interest incomes.

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