Deduction of Tax (TDS) from 'Interest' other than Interest on Securities [Section 194A]

1. Who is liable to deduct TDS on Interst U/s 194A

2. When TDS U/s 194A is to be Deducted ?

3. Where No TDS U/s 194A is to be Deducted at Source

4. Where there is No TDS or TDS at Lower Rate under section 194A [Section 197 Rule 28 and 28AA]

5. Rates of TDS U/s 194A for Financial Years 2018-19 and 2019-20

The provisions of tax deducted at source presently apply to several payments like salary, interest, commission, brokerage, professional fees, royalty, etc. In this part, you can gain knowledge on three major payments covered under the TDS mechanism viz.

1. TDS on interest other than interest on securities;
2. TDS on interest on securities and
3. TDS on fees for professional/technical services/royalty.

1. Who is liable to deduct TDS on Interst U/s 194A

The person (other than an individual or a Hindu Undivided Family) who is responsible for paying to a resident any income by way of interest other than 'interest on securities', is required to deduct tax thereon at the rates in force.

Individuals and HUF whose total sales/turnover/receipts from the business/ profession carried on by him in the immediately preceding financial year exceeded the monetary limit specified under section 44AB(a) or (b), are also required to deduct tax at source.

In other words, an individual or a HUF is liable to deduct TDS under section 194A, if such individual or HUF was liable to get his/its accounts audited under section 44AB in the preceding financial year.

Person responsible for TDS:

In the case of credit or, as the case may be, payment or any other sum chargeable under the provisions of this Act, the payer himself, or, if the payer is a company, the company itself including the principal officer thereof.

2. When TDS U/s 194A is to be Deducted ?

Tax is to be deducted either at the time of payment of interest in cash or by issue of cheque or draft or by any other mode or credit of it to any account, whichever is earlier.

Where any income by way of interest as aforesaid is credited to any account whether called "Interest payable account" or "Suspense Account" or by any other name in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee.

Tax not to be deducted at source in respect of the provision for interest accrued but not due:

The whole scheme of TDS proceeds on the assumption that the person whose liability is to pay an income knows the identity of the beneficiary or the recipient of the income. In this view of the matter. TDS mechanism cannot be put into practice until identity of the person in whose hands it is includible as income can be ascertained.

3. Where No TDS U/s 194A is to be Deducted at Source

(A) Where interest paid or credited does not exceed Rs.10,000 / Rs. 5,000 [Section 194A(3)(i)]

No tax is to be deducted at source, where the aggregate amount of such interest to be paid or credited to the account of payee during the financial year does not exceed:

1. Rs. 10,000, where the payer is a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution, referred to in section 51 of that Act);

2. Rs. 10,000, where the payer is a co-operative society engaged in carrying on the business of banking;

3. Rs. 10,000, on any deposit with post office under any scheme framed by the Central Government and notified by it in this behalf; and

4. Rs. 5,000 in any other case.

(B) Where such Interest is paid to certain Specified Persons

Where such income is credited or paid to the following persons, no tax is required to deducted at source under Section 194A —

1. a banking company or a co-operative society engaged in the banking business (including a cooperative land mortgage bank), or

2. any financial corporation established by or under a Central, State or Provincial Act;

3. the Life Insurance Corporation India;

4. the Unit Trust of India; or

5. any company or co-operative society carrying on the business of insurance;

6. such other institution association or body or their class as the Central Government may notify in the Official Gazette;

7. a partner of the firm, where payer of interest is firm;

8. a member of a co-operative society or any co-operative society where payer is a co-operative society [Section 194A(3)(v)];

9. a depositor in respect of deposit in a notified scheme framed by the Central Government (eg, Post Office time deposits, monthly income account, National Saving Certificates, Kisan Vikas Patras, Indira Vikas Patras, etc.)

10. any depositor in respect of deposit with a primary agricultural society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank [Section 194A(3)(viia)];

11. any depositor in respect of deposit with a banking company or of a co-operative society (other than a society referred to in clause (x) above engaged in banking business where time deposits have been made before 1.7.1995;

12. Any assessee where interest is payable to him under direct tax laws;

13. An assessee where interest is credited to his Non-Resident (External) Account;

14. Any assessee where interest is on account of recurring deposit and saving account with banks or co-operative societies other than mentioned in clause (x) above;

15. any income credited by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal;

16. any income paid by way of interest on the compensation amount awarded by the Motor 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 fifty thousand rupees;

17. Any assessee on such income which is paid or payable by an infrastructure capital company or infrastructure capital fund or a public sector company or a scheduled bank in relation to a zero coupon bond issued on or after 1.6.2005 by such company or fund or public sector company or a scheduled bank;

18. A business trust if such income is by way of interest referred to in section 10(23FC).

(C) Where a Self Declaration under Form No. 15G/15H is furnished by a particular Person [Section 197A(1A), (1B) and (1C)]:

A person, other than a company or firm may furnish a declaration in writing in duplicate in new Form No. 15G to the payer to the effect that there is no tax payable on his Total Income. In this case, the payer shall not deduct any tax at source.

However, as per section 197A(1B), the assessee cannot furnish the declaration under this clause if the aggregate amount of the following incomes credited or paid during the previous year in which such income is to be included exceeds the maximum amount which is not chargeable to tax:

1. Payment from accumulated balance of recognized provident fund, if taxable.

2. Interest on securities.

3. Interest other than interest on securities.

4. Payment in respect of life insurance policy, if taxable.

5. Insurance commission

6. Payment in respect of deposit under National Saving Scheme.

7. Payment in respect of rent (applicable w.e.f. 1.6.2016).

As per section 206AA(2), declaration under Form No. 15G or 15H shall not be valid if it does not contain the permanent account number of the declarant.

In case any declaration becomes invalid, the deductor shall deduct the tax @ 20% except where the payment is made from accumulated balance of recognised provident fund where it will be deducted at the maximum marginal rate.

The payer of the income is required to deliver to the Principal Commissioner or Commissioner one copy of declaration given under new Form 15G on or before the 7th day of month next following the month in which the declaration is furnished to him.

(D) No TDS under Section 194A by the Offshore Banking Unit [Section 197A(1D)]:

No deduction of tax shall be made by the Offshore Banking Unit set up in Special Economic Zone from the interest paid—

1. on deposit made on or after the 1st day of April, 2005, by a non-resident or a person not ordinarily resident in India; or

2. on borrowing, on or after the 1st day of April, 2005, from a non-resident or a person not ordinarily resident in India.

(E) Any payment made to New Pension System Trust [Section 197A(1E)]:

Notwithstanding anything contained in this Chapter, no deduction of tax shall be made from any payment to any person for, or on behalf of, the New Pension System Trust referred to in section 10(44).

(F) No deduction of tax U/s 194A from Specified Payment to Notified Institutions, Association or Body, etc. [Section 197A(1F)]:

No deduction of tax shall be made from such specified payment to such institution, association or body or class of institutions, associations or bodies as may be notified by the Central Government in the Official Gazette, in this behalf.

(G) No TDS U/s 194A for Certain entities who are required to File Return under section 139(4A) or 139(4C) [Rule 28AB]:

As per rule 28AB certain entities who are required to file there return of income under section 139(4A) or 139(4C) may apply under Form No. 13 for no deduction of tax at source provided certain conditions are satisfied.

(H) No TDS U/s 194A for Certain entities whose income is unconditionally Exempt under section 10:

In case of certain entities whose income is unconditionally exempt under section 10 and who are statutorily not required to file return under section 139 there will be no requirement for TDS since their income is in any way Exempt.

4. Where there is No TDS or TDS at Lower Rate under section 194A [Section 197 Rule 28 and 28AA]

Any person to whom interest is payable may make an application in Form No. 13 to the Assessing Officer and obtain such certificate from him, as may be appropriate, authorising the payer not to deduct tax or to deduct tax at a lower rate.

As per section 206AA(4), no certificate under section 197 for deduction of tax at Nil rate or lower rate shall be granted unless the application made under that section contains the Permanent Account Number of the applicant.

5. Rates of TDS U/s 194A for Financial Years 2018-19 and 2019-20

1. In case the payee is a person other than a company resident in India : 10%

2. In case the payee is a domestic company : 10%

Notes.—

1. The rate of TDS will be 20% in all cases, if PAN is not quoted by the deductee.

2. No surcharge, education cess and SHEC shall be added. Hence, TDS shall be deductible at basic rates.