Section 194A: TDS on interest other than interest on securities

“Unlock the intricacies of Income Tax Section 194A: TDS on interest payments beyond specified thresholds, excluding interest on securities. Learn about the applicability, rates, and compliance under this section. Dive into detailed insights on interest from fixed deposits, bonds, unsecured loans, loans and advances, and payments to Non-Banking Financial Companies (NBFCs). Understand the obligations of the payer, including TDS deduction, deposit, issuing certificates, and reporting in income tax returns. Stay tax-compliant with this comprehensive guide.”

Section 194A of the Income Tax Act, 1961 governs the deduction of tax at source (TDS) on interest payments other than interest on securities. This provision ensures that the tax liability on such interest income is collected at the source itself. In this article, we will provide a detailed overview of Section 194A, focusing TDS on interest earned from fixed deposits, bonds, interest paid on an unsecured loan, interest paid on loans and advances, and interest paid to Non-Banking Financial Companies (NBFCs). We will explore the applicability of TDS, rates, exemptions, and compliance requirements under this section.

Section 194A mandates that any person responsible for paying interest (other than interest on securities) exceeding the specified threshold amount is required to deduct TDS at the prescribed rates before making the payment. The TDS amount is then deposited with the Income Tax Department on behalf of the recipient.

The present article helps to understand the provisions attached with Section 194A of the Income Tax Act, 1961.

Essential features of section 194A are summarized hereunder –

• Any person, other than individual or HUF, who is paying interest (other than interest on securities) to a resident is required to deduct TDS.
• If the individual or HUF are liable to get their accounts audited as per section 44AB [clause (a) or (b)], then, such individual or HUF would be required to deduct TDS on payment of interest (other than interest on securities) to a resident as per provisions of section 194A.
• Section 194A is applicable only in case of payment of interest to a resident i.e., the provisions of section 194A doesn’t apply to the payment of interest to a non-resident. The same is covered within the purview of section 195.

Point of time when TDS is to be deducted –

The Deductor liable to deduct TDS as per provisions of section 194A is required to deduct TDS within earlier of the following dates –

• At the time of credit of income to the payee’s account or in a Suspense/Provisional Account; or
• At the time of payment in cash, cheque, draft or any other mode.

The Intricacies of TDS on Provisional/Suspense Entry: In adherence to TDS rules, the moment an amount is credited to a suspense or provisional account, it is deemed equivalent to being credited to the payee’s account. Consequently, TDS becomes applicable and must be deducted at source. This implies that even provisions recorded in the books of accounts, where TDS provisions are applicable, necessitate tax deduction at source.

The Provisional Entry and Reversal Process: To ensure proper accounting practices, a provisional entry is made prior to posting the actual entry. This provisional entry establishes the TDS liability associated with the transaction. Subsequently, when the actual entry is posted, the provisional entry is reversed, reflecting the correct TDS calculations and adjusting the liability accordingly. This two-step process facilitates accurate TDS accounting.

Calculation of TDS on Provisional Entry: During the provisional entry stage, the TDS amount is calculated as per the applicable rates and regulations. This ensures that the provisional TDS liability is accurately recorded and reflected in the financial records. However, it is crucial to note that upon the posting of the actual entry, the system should not recalculate TDS, as it has already been deducted during the provisional entry stage.

Rate of TDS on interest other than interest on securities –

If the provisions of section 194A of the Income Tax Act gets attracted, the Deductor is liable to deduct TDS on interest other than interest on securities @10%.

However, if the Permanent Account Number is not furnished, in that case, the Deductor would be liable to deduct TDS @20% i.e., maximum marginal rate.

The Time limit of depositing the deducted TDS –

The Deductor who has deducted TDS as per provisions of section 194A are required to deposit the same within the following due dates –

Threshold Exemption limit under section 194A –

TDS is not to be deducted under the following case –

List of interest exempted under Section 194A –

Some of the important lists of interest which is exempted under section 194A are –

• Interest paid to any bank, financial corporation, Life Insurance Corporation Unit Trust of India, any company or a co-operative society engaged in the insurance business.
• Interest paid by a partnership firm to the partners.
• Interest paid by co-operative society to its members.

TDS on Interest from Fixed Deposits:

1. Applicability: TDS is applicable on interest earned from fixed deposits in banks, cooperative societies, and post offices. The threshold for TDS deduction on fixed deposit interest is currently set at Rs. 40,000 for individuals and Rs. 50,000 for senior citizens.
2. TDS Rates: The TDS rate for interest earned from fixed deposits is 10% for individuals who have provided their Permanent Account Number (PAN). In the absence of PAN, the TDS rate is higher at 20%.
3. Exemptions and Form 15G/15H: Individuals can submit Form 15G or 15H to the deductor if their total income is below the taxable limit, thereby claiming exemption from TDS deduction.

TDS on Bonds:

1. Applicability: TDS is applicable on interest earned from bonds issued by companies, government institutions, and financial institutions. The threshold for TDS deduction on bond interest is currently set at Rs. 5,000.
2. TDS Rates: The TDS rate for bond interest is generally 10% for individuals. However, rates may vary depending on the type of bond, the residency status of the recipient, and other factors. It is advisable to refer to the specific provisions and rates mentioned in the Income Tax Act or consult a tax professional for accurate information.

TDS on Interest Paid to NBFCs:

1. Applicability: TDS is applicable on interest payments made by individuals or companies to Non-Banking Financial Companies (NBFCs) when the interest amount exceeds the specified threshold.
2. TDS Rates: The TDS rate for interest paid to NBFCs is generally 10% for individuals. However, rates may differ based on the nature of the payment and the provisions mentioned in the Income Tax Act.

What is Section 194A?

Section 194A covers provisions relating to deduction of TDS on interest other than interest on securities. If the provisions gets attracted, the TDS @10% is to be deducted by the Deductor.

What is 194A payment?

Section 194A payment is in the form of interest (other than interest on securities). Interest payment like interest on fixed deposit, interest on any loan or interest on recurring deposits are covered within the same.

Is TDS deducted on interest paid to bank?

No, when interest is paid to bank against the loan taken, TDS provisions are not applicable, and hence TDS is not deducted on interest paid to the bank.

Who is liable to deduct TDS under 194A?

The person who is paying interest (other than interest on securities) is liable to deduct TDS if the provisions of section 194A get attracted.

Is TDS deducted on interest to partners?

No interest paid by the partnership firm to partners are not covered within the purview of section 194A, and hence TDS is not required to be deducted.

Conclusion: Section 194A of the Income Tax Act ensures the deduction of TDS on interest other than interest on securities. It imposes the responsibility on the payer to deduct TDS on interest earned from fixed deposits, bonds, and interest paid to NBFCs. It is essential for both payers and recipients of interest income to comply with the provisions of this section to ensure proper tax compliance. Here are the key compliance requirements:

1. TDS Deduction and Deposit: As a person responsible for making interest payments, it is crucial to deduct TDS at the applicable rates from the interest amount and deposit it with the government within the specified due dates. Failure to do so can attract penalties and interest charges.
2. TDS Certificate: The deductor is obligated to issue a TDS certificate to the recipient of the interest income. Form 16A or Form 16B, as applicable, should be provided, containing details of the TDS deducted. The certificate serves as proof of tax deduction and is necessary for the recipient to claim credit for the TDS amount in their income tax returns.
3. Reporting in Income Tax Returns: Recipients of interest income must include the details of TDS in their income tax returns while filing. This ensures that the TDS amount is properly accounted for and reconciled with their tax liability. Any discrepancies can be rectified through the process of tax return filing.
4. TAN (Tax Deduction and Collection Account Number): Payers who are required to deduct TDS on interest payments need to obtain a TAN from the Income Tax Department. TAN is a unique identification number used for TDS-related transactions and reporting. It is important to quote the TAN correctly in TDS challans, certificates, and other relevant documents.
5. Timely Compliance: Adhering to the due dates for TDS deduction, deposit, and issuance of TDS certificates is vital. Late filing or non-compliance can lead to penalties, interest charges, and legal consequences. It is advisable to stay updated with the latest tax laws, amendments, and notifications related to TDS provisions.

In conclusion, complying with the provisions of Section 194A is essential to ensure proper deduction and deposit of TDS on interest payments other than interest on securities. By fulfilling the compliance requirements, both payers and recipients can avoid penalties, maintain accurate financial records, and contribute to a transparent tax system. It is advisable to consult a tax professional or refer to the relevant provisions of the Income Tax Act for specific guidance and clarification regarding TDS on interest income.

Readers to note article is republished with changes on 18.05.2023 explaining requirement of TDS on Provisional entries)

Also Read-