Section 194A of the Income Tax Act

Section 194A of the Income Tax Act, 1961, deals with the deduction of tax at source (TDS) on interest income other than interest on securities. In simple terms, if the interest you earn from deposits, loans, or other specified sources crosses the prescribed limit, the payer is required to deduct tax before making the payment.

This provision applies mainly to banks, post offices, companies, and other financial institutions that pay interest. The objective is to ensure that tax on such income is collected at the source itself, making compliance easier and reducing the chances of tax evasion.

• 1. Banks: This includes all scheduled commercial banks, co-operative banks, and even small finance banks. These institutions must monitor interest payouts on: Fixed Deposits (FDs) and Recurring Deposits (RDs). They often automate TDS deduction through their core banking systems, based on PAN and interest calculations.
• 2. Post Offices: Only designated post offices that offer deposit schemes like 5-year Post Office Time Deposit or Monthly Income Scheme (MIS) are required to deduct TDS if the interest exceeds ₹40,000 limit.
• Exception: Interest from the Public Provident Fund (PPF) or Senior Citizen Saving Scheme (SCSS) is not subject to TDS under 194A, but the latter may have TDS under other provisions if interest exceeds ₹50,000 in a year.
• 3. Companies: Any company that pays interest on loans taken from individuals or institutions, debentures issued to the public or private investors, and inter-corporate deposits (unless exempt) must deduct TDS when the threshold (Rs. 10,000) is exceeded.
• Example: If a company issues Non-Convertible Debentures (NCDs) and pays ₹60,000 interest to an investor, it must deduct TDS under Section 194A.
• 4. Other Financial Institutions: NBFCs (Non-Banking Financial Companies), credit co-operative societies, housing finance companies. These entities are treated like companies and are subject to TDS deduction obligations under Section 194A unless specifically exempt.
• 5. Individuals or Partnership Firms: Generally, individuals or firms are not required to deduct TDS unless, turnover is exceeding ₹1 crore for firms and 50L for individuals in the previous year, and pays interest on business loans or deposits, they must deduct TDS on interest exceeding the threshold.

• TDS is deducted from the person who earns the interest (the recipient).
• The bank, post office, or company deducts this tax and sends it to the Income Tax Department.
• The amount shows up in the recipient’s Form 26AS/AIS as tax already paid.
• Later, while filing the Income Tax Return (ITR), the recipient can use this TDS to reduce their final tax.
• If more tax is cut than required, the extra can be claimed back as a refund.

Different payer categories have different income thresholds. The TDS rate also depends on whether PAN is provided. Check the table below to understand it easily

*If the payee does not provides a valid PAN, than TDS is deducted at the applicable lower rate.

Not everyone has a taxable income. To prevent unnecessary TDS, the law allows for lower or nil deduction in certain cases. TDS under Section 194A is triggered only when certain conditions are met. Here’s when it applies:

Some interest payments are fully exempt from TDS. These include:

• Residents aged 60 or above don’t have TDS on interest income up to ₹100,000 per bank, post office, or co-operative bank, in a financial year.
• Seniors (60+ years) can submit Form 15H to prevent TDS on their interest income if their total income is below the taxable threshold.
• Interest paid by a partnership firm to its partners is exempt from TDS.
• Interest paid to banks or insurance companies.
• Interest paid by cooperative societies to their members or other cooperative societies.

Here’s a simple breakdown of where Section 194A applies:

Companies often overlook compliance when paying interest to vendors or lenders and fail to deduct TDS. Failure to comply can result in a penalty, including interest, and the disallowance of an expense; therefore, compliance is paramount.

Once TDS is deducted, it must be deposited promptly. The timelines are strict:

Note: TDS deducted between April and February must be deposited by the 7th of the following month.

Both Sections aim to improve tax compliance but apply to different transactions.

Section 194A of the Income Tax Act 1961 ensures that the collection of tax on interest income is made at source, instead of on a year-end basis. It is imposed on the majority of interests, and it is imposed on securities, with specified thresholds and exemptions to take the pressure off small taxpayers and older citizens.

Anyone who receives interest on money can learn when TDS is charged, various rates and available exemptions, and they can ensure that they do not receive unpleasant shocks when filing their returns.

Disclaimer: Tax provisions are subject to change with time. Always check the latest notifications from Income Tax Department or consult a tax professional for personalized advice.