Section 194A deals with TDS on interest other than the interest on securities. Provisions related to the TDS on interest on securities are in section 194.
The current rate of TDS under this section is given by Part II of the First Schedule to the Annual Finance Act. At present, the rate is 10% for both in the case of resident non-corporate assessees and the domestic companies.
The main provisions of this section are as listed below –
- This section applies only to interest, other than “interest on securities“. It applies when such interest is credited or paid by assessees other than individuals or Hindu Undivided Families that are not subject to tax audit under section 44AB in the immediate previous financial year. I.e. individuals and HUFs subject to a tax audit in the immediate previous financial year and all other including companies, firms, associations of persons, local authorities and artificial juridical persons are under a legal obligation to deduct TDS under this section. Such TDS has to be deducted under this section for payment either paid or when credited in books of account, whichever is earlier.
- These provisions apply only to the interest paid or credited to residents. In respect of payments to non-residents, the provisions of section 195 are applicable.
- The deduction of tax must be made at the time of crediting such interest to the payee or at the time of its payment in cash or by any other mode, whichever is earlier.
- TDS under this section has to be deducted even when it is credited in the books of account and no entry of payment is present. The account to which such interest is credited may be called “interest Payable Account” or “Suspense Account” or by any other name.
The deduction of tax at source is required in all cases where the amount of income by way of interest credited or paid or likely to be credited or paid during the year is more than ₹ 5,000.
The CBDT has, vide Circular No. 3/2010 dated 2.3.2010 has given relaxation to Banks under this Section to deduct TDS on time deposits. They do not need to deduct TDS under this section at the time of its entry in their Core-branch Banking Solutions (CBS) Software for the purpose of mere calculating interest on daily/monthly basis or macro monitoring the Accounts. It is deducted only when limits are crossed and at the time of crediting the accounts either at the end of the financial year or at the intervals used by banks mostly quarterly or semi-annually.
Limits for deducting TDS
TDS is deducted if and only if following limits are crossed –
- Amount paid or credited exceeds or is likely to exceed ₹ 5,000 in the financial year.
- This limit is increased to ₹ 10,000 in case of interest paid on –
- Time deposit with a banking company;
- Time deposits with a co-operative society engaged in banking business; and
- Deposits with a post office under notified schemes.
The limit will be calculated with respect to the income credited or paid by a branch of a bank or a co-operative society or a public company in case of:
- Time deposits with a bank
- Time deposits with a co-operative society carrying on the business of banking; and
- Deposits with housing finance companies, provided
- They are public companies formed and registered in India
- Their main object is to carry on the business of providing long-term finance for construction or purchase of houses in India for residential purposes.
This limit of ₹ 5,000 or ₹ 10,000 is reckoned when a branch credits such amount. However, to stop misusages, a second proviso has been inserted in section 194A(3)(i). It requires the limit be calculated as a whole to the entity and not just with regard to the branch if the entity has adopted core banking solutions.
Exemptional cases when no TDS is deducted under this Section
For the following cases, no TDS will be deducted under this section –
- For interest paid or credited by a firm to any of its partners;
- Income paid or credited by a co-operative society (other than a co-operative bank) to a member thereof or to such income credited or paid by a co-operative society to any other co-operative society;
- Interest paid or credited in respect of deposits under any scheme framed by the Central Government and notified by it in this behalf;
- Interest income credited or paid in respect of deposits (other than time deposits made on or after 1.7.1995) with
- A bank to which the Banking Regulation Act, 1949 applies; or
- A co-operative society engaged in carrying on the business of banking.
- Interest credited or paid in respect of deposits with primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank.
- Interest income credited or paid by the Central Government under any provisions of the Income Tax Act, 1961, the Estate Duty Act, the Wealth-tax Act, 1957 (now irrelevant), the Gift-tax Act, the Companies (Profits) Surtax Act or the Interest Tax Act.
- Interest paid or credited to the following entities –
- Banking companies, or co-operative societies engaged in the business of banking, including co-operative land mortgage’ banks;
- Financial corporations established under any Central, State or Provincial Act
- The Life Insurance Corporation of India
- Companies and co-operative societies carrying on the business of insurance
- The Unit Trust of India (UTI); and
- Notified institution, association, body or class of institutions, associations or bodies. [Currently, National Skill Development Fund has been notified by the Central Government for this purpose].
- Income paid by way of interest on the compensation amount awarded by the Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income paid during the Financial year does not exceed ₹ 50,000.
- Income paid or payable by an infrastructure capital company or infrastructure capital fund or public sector company in relation to a zero coupon bond issued on or after 1.6.2005.
Filing of Return
Such Returns shall be filed in Form 26Q. In case the person whose TDS is deducted doesn’t furnish his PAN, the rate used to deduct TDS should be 20% instead of 10%.
Often people confuse with TDS being deducted by Banks on every interest above ₹ 10,000. Banks can deduct TDS on payment of interest for Termed Deposits only, i.e. fixed deposits. For saving accounts, they cannot deduct TDS. However, this doesn’t mean the same is tax-free. It is exempt up to ₹ 10,000 only. Thereafter interest from saving account is taxable. It is shown as income from other sources and is paid on a self-assessment basis.
For banks, TDS is deducted and threshold limit of ₹ 10,000 is used by them for payments of all branches altogether. Earlier, this limit was used by each branch for deducting TDS on its own payments. But, now if such Banks have adopted CBS(which all banks have already adopted) such limits will be used for payments made by all branches altogether.