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Section 194A of Income Tax Act

section 194a
(Source: mybillbook)

Did you know lending institutions deduct a certain amount as tax while crediting interest on fixed deposits yearly? This deduction is called TDS that falls under Section 194A of the Income Tax Act.

This tax is also applicable on interest repaid on secured and unsecured credit forms.

Read on to understand how Section 194A of the Income Tax Act works and its variables.

What Is Section 194A in Income Tax?

Section 194A states that an individual is liable to pay tax on interest sources. This interest includes the one repaid by banks on fixed deposits, advances, and loans. It also includes the interest paid on unsecured loan forms.

However, interest in securities does not fall under this section. Moreover, the TDS is deducted under Section 194A only when payment is made to a resident.

It is essential to check the terms and conditions related to the act for a detailed understanding. The government mandates certain people to pay this tax.

You will find these specifications to pay TDS in the following section.

Who Are Liable to Pay TDS Under Section 194A of Income Tax Act?

Following individuals are required to pay TDS -

  • Income tax assesses such as Company, partnership firm, BOI, AOP, etc.
  • Individuals and Hindu Undivided Families who are liable for assessment under Section 44AB in the preceding year. 
  • An individual or a HUF whose annual turnover exceeds ₹1 crore in case of business and ₹50 lakh for professionals during the financial year in which such interest is paid or credited.

The mentioned individuals are obligated to pay TDS under Section 194A. However, there are certain parameters set that define when TDS is deducted.

When Is Tax Deduction Under Section 194A Applicable?

A tax deductor or payer shall deduct TDS if the amount of such interest paid or credited is likely to be credited in a financial year.

The amount will exceed ₹40,000 where the payer is

  • Co-operative society participating in credit lending business
  • Lending institutions
  • Post office (when the Central Government notifies to pay the deposit).

Note that no TDS is deductible from interest earned up to ₹50,000 under 194A for senior citizens from FY 2018-19.

Additionally, the tax deduction under Section 194A specifies the following sources for interest income –

  • Bank deposit
  • Schemes on recurring deposit
  • Post office deposits
  • Fixed deposit schemes

When Does Nil/Lower TDS Deduction Take Place?

Following are the scenarios when TDS is applicable at a lower rate or nil.

Declaration via form 15G/15H u/s 197A

No tax is deductible when a recipient submits declaration under Section 197A to a concerned payer with his/her PAN.

For this, they need to fulfil certain conditions -

  • Recipient must be a person, not a company or firm. Their tax on total income of the previous year needs to be NIL
  • Total income does not exceed the exemption limit for AY 2020-21. This amount should not exceed ₹5,00,000.
  • Senior citizen taxpayers whose total taxable income is below ₹5 lakh exemption threshold can submit Form 15H with their banks to prevent this deduction on their FD interest.

Nominees of SCSS investors can produce this declaration at the time of payment after a depositor's death to gain TDS exemptions under Section 194A.

Declaration via Form 13 under Section 197

A recipient can apply in Form no.13 to the Assessing Officer to get a certificate stating reduced tax deduction.

Here are certain factors that taxpayers need to consider –

  • There is no time limit for application. Individuals can file it at any time before the actual tax deduction. 
  • Individuals without PAN cannot apply for the certificate.
  • A recipient needs to provide a copy of such certificate to the person responsible for deducting TCS lower or no deduction of tax.

What Is Section 194A TDS Rate?

 

According to 194A of Income Tax Act, TDS is deduct ible at 10%.

If a recipient does not furnish his/her PAN to a deductor, then TDS is applicable at 20%. However, there will be no additional education cess, surcharge, or SHEC besides the basic rates.

Here is a table to explain the rate distribution.

Payment Made By

Rate of TDS

Lending Institutions (with PAN)

10%

Lending Institutions (without PAN)

20%

Depending on these factors, individuals can understand the 194A TDS deduction limit and specification.

Note that the deduction limit for banks is ₹10,000 for banks and ₹5,000 for other financial institutions.

For instance, a bank pays ₹20,000 interest on a fixed deposit to a customer. Since this amount is more than the threshold of ₹10,000, the bank is liable to deduct TDS at 10% on the interest payable, i.e. ₹20,000. TDS is also applicable even if the amount is only credited to the customer account.

What Is the Deadline for Section 194A Deposit?

The timeline for payment under this section is as follows -

  • Individuals must deposit TDS between April to February before the 7th of next month.
  • Individuals need to deposit the amount on or before 30th April if the tax deduction takes place in March.

These are some of the basic information taxpayers must know about Section 194A of the Income Tax Act. This will help them streamline the process of claiming tax benefits. Moreover, paying TDS and respective tax on time will help avoid unwarranted penalties.

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