Section 194A of Indian Income Tax Act

Section 194A

Section 194A deals with the TDS deduction on interest other than interest on securities such as interest on loans and advances, interest on FD, etc.

Section 194A of Income Tax Act

Under section 194A of Income Tax Act; every person other than an individual or HUF, who is responsible for paying interest (interest other than on securities) to a resident, is liable to deduct TDS. Thus, this section covers only the payment made to a resident and not the payment made to non-resident.

An individual or HUF is liable to deduct TDS under this section; only if such individual or HUF is liable to get audit his accounts U/S 44AB in the previous FY. As per this section, there is tax deduction at the time of payment or credit of interest to the account of the payee; whichever is earlier. Every person other than an individual or HUF has to deduct TDS; at the time of credit in the books of accounts such as ‘interest payable account’ or ‘suspense account’ or any other account; even if no entry of payment is present. However, if Motor Accident Claims Tribunal awards the interest on compensation; then there is tax deduction at time of payment (TDS applies only of interest exceeds Rs. 50000).

The deductor shall deduct TDS; only if the amount of such interest he pays/credits or likely to pay/credit in FY exceed;

  • Rs. 5000
  • Rs. 10000, if the payer is,
    – Banking company or a banking institution or any bank or
    – Co-operative society engaged in the banking business
    – Post office (on deposit under a scheme framed and notified by central Government).
  • Rs. 50000, if motor accident Claims Tribunal awards the interest on compensation.

Note: Banks can deduct TDS only on the payment of interest for term deposits or fixed deposits; and not on interest from the savings account.

Rate of deduction

Every person other than an individual or HUF shall deduct TDS; if the recipient of income furnishes his PAN; at 10%. In case, he fails to provide his PAN; TDS deduction rate is 20%. No surcharge or education cess or SHEC are added to the basic rates.

Exemptions U/ Section 194A

  • There is no tax deduction if a resident individual furnishes a declaration in writing in Form 15G/15H to the payer; to the effect that his income is below exemption limit. The following are the provisions in this regard:

          – Where the recipient is a senior citizen, the deductor must make a declaration in duplicate in Form 15H and where the recipient is other than a senior citizen, he must make in Form 15G.

       – Only a resident individual can make a declaration in Form 15G/15H and only if the annual interest does not exceed the exemption limit. (However, this condition is not applicable where; a resident senior citizen furnishes a declaration in Form 15H, even if annual interest exceeds the exemption limit; provided the tax payable on his total income is nil).

The payer receiving such a declaration in Form 15G/15H shall deliver one copy to the Principal Chief Commissioner or Principal Commissioner or Chief Commissioner or Commissioner; within seven days of the next month following the month in which he received such declaration.

  • The payee may approach the assessing officer by making an application in Form 13 for the issuance of a certificate for no deduction or lower deduction of TDS. Assessing officer may issue certificate in this regard if he is satisfied that the total income of the payee justifies the deduction of income-tax at any lower rate or nil deduction of income-tax. Remember that assessing officer shall issue a certificate for non-deduction of income tax directly to the person who made an application for issue of such certificate; whereas certificate of lower deduction of income tax shall be issued to payee itself. The payer shall deduct tax according to the certificate issued by the assessing officer i.e. no deduction or lower deduction of tax.
  • There is no tax deduction U/Section 194A in respect of interest which the firm credit or pays to its partners.
  • There is no TDS deduction on the excess amount which the party pays on account of delay payment on purchase bills.
  • No TDS is to be deducted when the interest is paid to any banking company or co-operative housing society engaged in banking business.
  • No TDS is to be deducted where the interest is paid to any financial corporation established by or under a Central, State or Provincial Act.
  • This section exempts interest paid to the LIC, Unit Trust of India, any company or co-operative housing society; engaged in the insurance business, any other institution, association or body or class of institutions; which the central government may notify, etc.
  • This section also exempts interest credited/paid in respect of deposits with a primary agricultural credit society; or a primary credit society; or a co-operative land mortgage bank or a co-operative land development bank.
  • Further, it also exempts interest which the Central Government credit/pays under any provision of Income Tax Act, 1961 or Wealth Tax Act, 1957.
  • There is no TDS deduction where the special purpose vehicle pays interest to business trust as given in section 10(23FC).

Where the non-government deductor deducts tax from interest during the month of April to February; he shall pay to the credit of central government on or before 7th of next month. If he deducts tax during during the month of March, the due date is on or before 30th April.

If any person liable to deduct TDS does not do so or fails to pay the whole or any part of the tax after deducting, to the government; then he is liable to pay simple interest at 1% for every month for delay in deduction; and at 1.5% for a period from which he deducts tax to the date on which he deposits the taxable amount; for delay in payment after deduction.

Deductor has to furnish a TDS certificate to the deductee in Form 16A for tax deducted on payments; other than salary on the quarterly basis as follows:

Months Due date for Non-Government deductor
April to June 15th August
July to September 15th November
October to December 15th February
January to march 15th June

After that, deductor has to furnish the details of tax deducted by him to the government; in the prescribed form on a quarterly basis as follows:

Months Due date for Non-Government deductor
April to June 31st July
July to September 31st October
October to December 31st January
January to march 31st May

Every person liable to deduct TDS has to obtain TAN (Tax Deduction Account Number); except person liable to deduct TDS U/Section 194A .

If the deductor has deducted tax during the year and pays it on or before the due date of filing the return as specified in section 139(1); the concerned expenditure will be deducted in the year in which expenditure is incurred.

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