Section- 194A

  • Section 194A deals with a deduction of TDS on interest other than interest on securities like Interest on Fixed Deposits, Interest on Loans and Advances other than banks.
  • Under section, 194A TDS is deducted only when payment is made to a resident person
  • Payment made to a non-resident person then tax is to be deducted under section 195 of income tax ACT, 1967.

Examples of TDS on interest covered

  • Interest paid on loan taken from friend or relative
  • Interest paid by bank on loan taken
  • Any unsecured loan

The recipient can give Form 15G/Form 15H to the payer of interest so that TDS will not be deducted.

Persons required to deduct TDS 

Following persons are required to deduct TDS:-

  1. Individual and HUF who are liable to audit under audit under section 44AB in the preceding year but those individual and HUF who are liable for audit due to the point (1) and (2) in section 44AB are required to deduct TDS.
  2. All other assesses i.e. Partnership Firm, Company, AOP and BOI.

Time of deduction

TDS on interest is to be deducted at the time of payment or credit to the account of the payee, whichever is earlier. Where any sum of interest is credited to any account whether called Interest payable account or suspense account or any other name, provisions of this section shall apply and TDS is to be deducted.

Rate of deduction

TDS is to be deducted at the rate of 10%. If the recipient of income doesn’t furnish his PAN to deductor then TDS is to be deducted @ 20%. No surcharge, education cess or SHEC will be added to the basic rates.

Section 194A of income tax act provides for deduction of TDS on payment made regarding interest.

Payment By Rate of TDS Threshold Limit
Other than banks 10% (If PAN is furnished) Rs 5,000
Other than banks 20% (If PAN is not furnished) Rs 5,000
Banks 10% (If PAN is furnished) Rs 10,000
Banks 20% (If PAN is not furnished) Rs 10,000

Exceptions on TDS on interest

  1. Amount of such interest paid or credited, or is likely to be paid or credited in a financial year does not exceed
  • 10,000 where the payer is a banking company, any bank, banking institution, co-operative society engaged in the business of banking, post office (on deposit under a scheme framed and notified by Central Government). Such amount is calculated branch wise if such institution adopted core banking solutions.
  • 5,000 in any other case.
  1. Interest credited or paid by a firm to a partner of the firm.
  2. Interest is paid or credited to any banking company, co-operative society engaged in banking business, public financial institutions, LIC, Unit Trust of India (UTI), a company or co-operative society carrying on the business of insurance or any institution Central Government notifies.
  3. Interest is paid by paid by a co-operative society (other than a cooperative bank) to a member thereof or to such income credited or paid by a co-operative society.
  4. Interest is paid or credited in respect of deposits under a scheme framed by Central Government and notified in Official Gazette.
  5. We can say that saving account interest is not liable for TDS deduction to such income credited or paid in respect of deposits except time deposits, with a banking company or co-operative society carrying on the business of banking.
  6. Interest is paid by Central Government to the individual under any provisions of the income tax act or wealth tax act.
  7. Interest paid on compensation awarded by the Motor Accidents Claims Tribunal where the amount or the aggregate of the amounts of such income credited or paid during the financial year does not exceed Rs. 50,000. Such interest if credited and not paid the whole amount of such interest credited without any condition.
  8. Interest is in relation to zero coupon bonds.
  9. Interest referred to in section 10(23FC).
  10. Discounting charges on export bill discounted is not treated as interest and thus not liable for tax deduction under section 194A.

The individual can stop deduction of TDS on interest income by filing Form No. 15G/15H to the taxpayer and can apply to assessing officer for no TDS or TDS at a lower rate under Section 197.

TDS on Interest on delayed payment

TDS is deductible under section 194A from the payment made for interest (other than interest on securities). Now the question arises whether TDS is also deductible when interest is payable due to delayed payment of purchase bills.

Section 2(28A) defines interest as

” Interest” means interest payable in any manner in respect of any money borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any kind of  service fees or other charges in respect of the money  borrowed or debt incurred or in respect of any credit facility which has not been utilized.

From the reading of the above section, it can be concluded that interest paid for delayed payment of purchase bills cannot be considered as interest for income tax act.

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