Section 194A: TDS On Interest Other Than Interest On Securities

1. What is Sec 194A in TDS?

Section 194A of the Income Tax Act outlines the provisions for Tax Deducted at Source (TDS) on interest payments other than interest on securities to a resident. This section specifies who is responsible for deducting TDS, under what circumstances TDS is applicable, the rate of TDS, exemptions, and relaxation provisions. The provision of this section is not applicable if payment is made to a non-resident.

2. Key Provisions of TDS under Sec 194A:

1. 1. Responsibility to Deduct Tax:
      TDS on interest other than interest on securities is the responsibility of:
      • Any person other than an individual or Hindu Undivided Family (HUF).
      • An individual or HUF whose total sales, gross receipts, or turnover from business or profession exceed ₹1 crore (for business) or ₹50 lakhs (for profession) in the financial year immediately preceding the one in which interest is credited or paid.
   2. Exemptions from TDS
      Exception for Low-Value Payments: No TDS is required if the interest payable during the financial year by the payer to the payee does not exceed the following limit:

      Payer	Threshold limit
      Banking Co, Co-operative Society engaged in the banking business, Post Office	40,000 (50,000 in case the payee is a senior citizen)
      In any other case	5,000

      For banking companies, the TDS limit is computed with reference to branches. However, if the payer has adopted Core Banking Solution (CBS), the limit is computed with reference to the entity and not individual branches.

      • Declaration for Exemption:
        Payees can apply for an exemption or lower TDS rates by submitting Form No. 13 to the Assessing Officer or furnishing a declaration in Form 15G.In the case of a resident individual whose income is below the exemption limit, such an individual can furnish a declaration in writing (as the case may be) to the payer, for non-deduction of tax under this section.15G: when the recipient is other than a senior citizen.
        15H: when the recipient is a senior citizen. The payee can also file an online application in Form No. 13 to obtain a certificate of no deduction of tax or lower deduction of tax at source. The AO may issue an appropriate certificate on receiving such an application. Before issuing the certificate in this regard AO verified the document and information that the total income of the payee justifies the deduction of income-tax at any lower rate or nil deduction of income tax.
      • Interest to partners:
        Tax will not be deducted under section 194A in respect of interest credited or paid by the firm to its partners.
      • Other case:
        Various categories of interest payments are exempt from TDS, including interest paid to any banking company, LIC, Unit Trust of India, any company or co-operative society carrying on the business of insurance, and any financial corporation established by or under a Central, State, or Provincial Act..
        Interest paid by a co-operative society (other than a co-operative bank) to a member, financial corporations, and government entities. Additional exemptions apply for specific schemes, deposits, and infrastructure bonds. The Central government has the power to issue notifications to provide the relaxation from deduction of tax on certain payments or to certain persons

Timing of TDS:

Tax must be deducted at the time of payment or credited to the payee, whichever is earlier.

TDS Rate:

According to Sec 194A TDS rate is:
i. 10% (without surcharge, health, and education cess). However, between May 14, 2020, and March 31, 2021, the rate was 7.5%.
ii. 20% in case PAN is not provided by the payee

Adjustment for Short Deduction:

The person responsible for deducting tax can adjust the TDS amount to correct any excess or deficiency arising from previous deductions or failures to deduct during the financial year.

Interest for delay in payment of TDS:

According to section 201, the person is liable to pay interest if TDS is required to be deducted on payment but not deducted or deducted but not deposited to the government. The person shall be liable to pay interest at the following rates:

• 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted.
• 5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid to the Government
  Note:  Amendment has been made to section 201 by The Finance Act, 2022 that if the Assessing Officer has passed an order treating the assessee in- default, then the interest shall be paid by the assessee in accordance with the said order. [Effective from Assessment Year 2023-24]

Conclusion:

Section 194A of the Income Tax Act governs the TDS on interest payments other than interest on securities. It lays down rules for who should deduct TDS, under what conditions, and at what rates. The section also provides exemptions and relaxation provisions to promote compliance and ensure the correct deduction of tax on interest income.

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