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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.
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.
Following individuals are required to pay TDS -
The mentioned individuals are obligated to pay TDS under Section 194A. However, there are certain parameters set that define when TDS is deducted.
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
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 –
Following are the scenarios when TDS is applicable at a lower rate or nil.
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 -
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.
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 –
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.
The timeline for payment under this section is as follows -
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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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.
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