Section 194A of the Income Tax Act, 1961 governs the Tax Deducted at Source (TDS) on interest income received by individuals, firms, or other entities, except for interest on securities. The provisions under this section are applicable when interest is paid or credited to a resident person (individual, Hindu Undivided Family (HUF), or a firm). It includes interest on bank deposits, fixed deposits, and other types of interest income.
In this blog, we will discuss the key aspects of Section 194A, including the conditions under which TDS is deducted, the rates, exemptions, and the impact on taxpayers.
What is Section 194A?
Section 194A mandates that a deductor (such as a bank or financial institution) must deduct TDS at the prescribed rates on interest payments made to a resident individual or a resident firm, provided the interest exceeds a certain threshold limit. The deductor is responsible for depositing the deducted tax with the government.
This section applies to interest income earned other than interest on securities. For example, interest earned on savings accounts, fixed deposits, recurring deposits, or even on loans, is subject to TDS under Section 194A.
Key Features of Section 194A
Applicability of TDS:TDS under Section 194A is applicable on interest payments made by:
Banks and financial institutions
Post offices
Cooperative societies
Non-banking financial companies (NBFCs)
Any other individual or entity making interest payments.
Threshold Limit for TDS Deduction: TDS is deducted if the total interest paid or credited exceeds the prescribed threshold limit during the financial year.
Threshold Limit for TDS Deduction:
₹40,000 (in a financial year) for individuals and HUFs (except senior citizens).
₹50,000 (in a financial year) for senior citizens (aged 60 years and above).
If the total interest paid is less than the threshold, no TDS will be deducted. However, the individual or entity receiving interest is still required to pay taxes on it while filing their income tax return.
TDS Rate under Section 194A:
10%: If the recipient provides their PAN.
20%: If the recipient does not provide a PAN.
In case of non-resident taxpayers, a different rate may apply as per the provisions of the Income Tax Act or the Double Taxation Avoidance Agreement (DTAA).
Time of Deduction: TDS is deducted at the time of crediting the interest to the account of the recipient or at the time of payment, whichever occurs earlier.
Payment of TDS: After deducting TDS, the deductor must deposit the tax to the government within the prescribed timelines and issue a TDS certificate (Form 16A) to the recipient. This certificate provides details of the TDS deducted and can be used by the recipient to claim the TDS credit while filing their income tax returns.
Example to Understand Section 194A
Let’s take an example to understand how TDS under Section 194A works.
Example 1: Suppose, Mr. Ramesh, a non-senior citizen, has a fixed deposit in XYZ Bank, and the interest earned for the financial year is ₹45,000. Since the interest exceeds the threshold limit of ₹40,000, the bank will deduct TDS at the rate of 10% (assuming Mr. Ramesh has provided his PAN).
Interest earned: ₹45,000
TDS at 10%: ₹45,000 × 10% = ₹4,500
Net amount received after TDS: ₹45,000 – ₹4,500 = ₹40,500
The bank will issue Form 16A to Mr. Ramesh, showing the TDS of ₹4,500. Mr. Ramesh can use this TDS credit when filing his income tax return.
Example 2: Now, if Mr. Ramesh had not provided his PAN to the bank, the TDS would be deducted at 20% instead of 10%.
Interest earned: ₹45,000
TDS at 20%: ₹45,000 × 20% = ₹9,000
Net amount received after TDS: ₹45,000 – ₹9,000 = ₹36,000
In this case, the net amount Mr. Ramesh receives is lower due to a higher TDS deduction.
Exemptions and Relief under Section 194A
No TDS for Senior Citizens:
If the total interest income received by a senior citizen (60 years or above) does not exceed ₹50,000 in a financial year, no TDS is deducted, irrespective of the source of interest.
This exemption is available only to individuals who are above the age of 60, and the exemption is applicable on interest from banks, post offices, and other financial institutions.
Section 10(15) Exemption:
Certain types of interest, such as interest on government securities, tax-free bonds, and other specified securities, are exempt from TDS under Section 10(15).
In such cases, the recipient may not need to provide PAN to the deductor.
Form 15G/15H:
If the taxpayer’s total income is below the taxable limit, they can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to the bank or financial institution to avoid TDS on interest income.
These forms are self-declarations stating that the taxpayer’s total income is below the taxable limit and they are eligible for TDS exemption.
TDS Return Filing for Section 194A
Employers or financial institutions deducting TDS under Section 194A are required to file TDS returns quarterly. These returns report the amount of TDS deducted and deposited with the Income Tax Department. The forms used for filing these returns are:
Form 24Q for salary payments
Form 26Q for non-salary payments like interest
The TDS returns are to be filed online through the TRACES portal, and the deductors must ensure that TDS payments are correctly accounted for to avoid penalties.
Impact on Taxpayers
Claim TDS Credit:The TDS deducted is credited to the taxpayer’s account in the Form 26AS. Taxpayers can check this form to verify the TDS amounts credited and claim them as a credit against their total tax liability when filing their income tax returns.
Filing Tax Returns:Interest income (subject to TDS) must be reported in the taxpayer’s income tax return, under the ‘Income from Other Sources’ head. If TDS has been deducted, it will reduce the final tax liability, and any excess TDS can be claimed as a refund.
Penalties for Non-Compliance
Non-Deduction of TDS:If a deductor fails to deduct TDS as per Section 194A, they may be liable for a penalty under Section 271C. The penalty can be up to the amount of tax that should have been deducted.
Non-Deposit of TDS:If the deducted tax is not deposited with the government on time, the deductor will have to pay interest under Section 201(1A). This interest is charged at the rate of 1% per month for the period of delay.
Conclusion
Section 194A ensures that TDS is deducted on interest income earned by individuals and entities, thereby streamlining the tax collection process. It is important to understand the threshold limits, the TDS rate, and the exemptions available under this section. By adhering to the provisions of Section 194A, individuals and entities can ensure compliance with the Income Tax Act while avoiding penalties.
As a taxpayer, always verify the TDS deducted and ensure that your Form 26AS reflects the correct amounts. If any issues arise, take timely action to resolve them through proper filing of tax returns and submitting the necessary documents.
For any further clarification, it is recommended to consult a tax professional or financial advisor to ensure accurate tax compliance.
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