Section 194A of the Income Tax Act: TDS on Interest Payments (Other than on Securities)

If you’ve ever earned interest on a fixed deposit, savings account, or any loan, you may have noticed some deductions made from your earnings. One of the reasons for these deductions is Section 194A of the Income Tax Act. This section deals with the Tax Deducted at Source (TDS) on interest income, ensuring that taxes on interest are paid at the time of payment or credit.

Whether you’re a person earning interest or a business paying interest, understanding this section is important for staying on top of your tax obligations.

What is Section 194A?

Section 194A governs the deduction of tax on interest payments, but it does not apply to interest on securities. Essentially, this means that if you’re receiving interest on things like fixed deposits, loans, or other types of deposits, TDS will be deducted, but interest on securities is handled differently.

Key Features of Section 194A:

Here are some important things you should know about Section 194A:

• Who is affected?
  If you’re earning interest from sources like banks, cooperative societies, or other financial institutions, this section will apply to you. However, it doesn’t apply to non-residents receiving interest income.
• Exemptions
  Some types of interest income are exempt from TDS. For example, the interest you earn on savings accounts doesn’t fall under this section, nor does interest on some specific government bonds or deposits with cooperative societies.
• Form 15G and 15H
  If your total income doesn’t cross the taxable threshold, you can submit forms like 15G (for those under 60) or 15H (for senior citizens) to avoid TDS deductions. This is particularly helpful if your total income is below the taxable limit and you don’t want tax deducted at source.

Who Deducts TDS Under Section 194A?

TDS under Section 194A must be deducted by anyone paying you interest. This includes:

• Businesses: If you’re a business entity with annual sales over Rs. 1 crore (for businesses) or Rs. 50 lakh (for services), TDS will apply.
• Banks and Financial Institutions: If you have a deposit with a bank or a cooperative society, they will deduct TDS when the interest exceeds the threshold limits.

When is TDS Deducted?

TDS is deducted at the time the interest is credited to your account, or when it’s physically paid to you. This means, even if you don’t withdraw the interest amount, TDS can still be deducted when it’s credited to your account. For example, if the interest is added to your fixed deposit, it’s considered as “credited,” and the TDS is deducted accordingly.

TDS Rates under Section 194A:

The TDS rate depends on whether you provide your PAN number:

• If you provide a valid PAN, the TDS rate is typically 10%.
• If you don’t have a PAN, the rate increases to 20%.

For example, if you earn Rs. 60,000 as interest from a fixed deposit, and you’ve provided your PAN, the bank will deduct 10% TDS on the interest. If no PAN is provided, the deduction will be at 20%.

Thresholds for TDS:

• Rs. 40,000 – For most individuals, this is the minimum interest amount above which TDS applies.
• Rs. 50,000 – If you’re a senior citizen, the threshold is higher.

When TDS is Not Required?

TDS is not deducted in the following cases:

• If the interest income is below the prescribed threshold (Rs. 40,000 for regular individuals or Rs. 50,000 for senior citizens).
• If you’re a partner in a partnership firm, no TDS will be deducted on interest paid to you.
• If you receive interest from savings accounts, it’s not subject to TDS.

Time Limit to Deposit TDS:

If you’re deducting TDS, it needs to be deposited by the 7th of the next month for taxes deducted from April to February. For taxes deducted in March, the last date for deposit is April 30th.

Lower TDS Rate for Interest Income:

If your income is low or you believe you should be taxed at a lower rate, you can apply for a certificate under Section 197. This certificate will allow you to pay a reduced TDS rate or avoid TDS altogether.

Exemptions to 194A:

>If you submit Form 15G to the bank, stating your income is below the taxable limit, they won’t deduct TDS on your interest income.

>If you’re a member of a cooperative society, and you earn interest on your savings there, TDS doesn’t apply to that interest payment.

Conclusion-

Section 194A is a key section in the Income Tax Act, ensuring that tax is deducted on interest income at the time it is paid or credited. If you earn interest from banks, post offices, or financial institutions, make sure you’re aware of the thresholds and exemptions to avoid surprises at tax time.