Table of Contents
1. Section 194A of the Income Tax Act, 1961
This section contains provisions relating to TDS on interest payments (other than interest on securities) made to residents.
2. Who should deduct tax under this section?
- Individuals/HUF whose turnover/gross receipts exceed Rs. 1 crore or Rs. 50 lakhs respectively during the financial year immediately preceding the financial year in which such interest is paid
- Any other person responsible for paying interest (other than interest on securities) to residents.
3. Does this section apply to non-residents?
- No, the provisions of section 194A apply only in respect of interest paid to residents.
- In the case of interest paid to non-residents, tax has to be deducted under section 195 read with section 115 of the Income Tax Act, 1961.
4. What is the rate at which tax is deducted under section 194A?
- As per section 194A read with Part II of First Schedule to Finance Act, tax is to be deducted at 10% from the amount of interest.
- However, if the payee does not furnish PAN, tax is to be deducted at 20%
5. When should the tax be deducted under this section?
- At the time of credit of interest to the account of the payee or at time of payment, whichever is earlier.
- In case of interest on compensation awarded by Motor Accident Claims Tribunal, tax is to be deducted at the time of payment.
6. What is the maximum limit upto which no tax needs to be deducted under section 194A?
- No tax needs to be deducted under this section, if the amount of interest paid or credited does not exceed the below mentioned limits.
| Payer | Payee – Resident citizen | Payee – Resident senior citizen |
|---|---|---|
| Banking company | 40,000 | 50,000 |
| Co-operative society engaged in banking business | 40,000 | 50,000 |
| Post office | 40,000 | 50,000 |
| Other than above mentioned persons | 5,000 | 5,000 |
- The ceiling limit as specified above shall apply bank wise and not branch wise in respect of the banking companies or co-operative societies or public companies that has adopted core banking solutions (CBS).
7. Circumstances where no tax needs to be deducted under section 194A
No tax needs to be deducted in the following cases,
- Interest paid or credited to banks & co-operative societies engaged in the business of banking.
- Interest paid or credited to any financial corporation established by or under a Central, State or Provincial Act
- Interest paid or credited to LIC or UTI
- Interest paid or credited to any company or co-operative society carrying on the business of insurance.
- Interest paid or credited to a partner of a firm by the firm
- Interest paid or credited to a member of co-operative society by the co-operative society. (Refer FAQ no 8)
- Interest paid or credited to any other co-operative society by a co-operative society. (Refer FAQ no 8)
- Interest on the compensation amount awarded by the Motor Accidents Claims Tribunal
8. Circumstances where a co-operative society is required to deduct tax at source under section 194A
A co-operative society shall be liable to deduct tax if,
- The turnover/gross receipts of the co-operative society exceeds Rs. 50 crores during the financial year immediately preceding the financial year in which such interest is credited or paid and
- The aggregate amount of interest paid exceeds Rs. 50,000 in respect of interest paid to senior citizens and Rs. 40,000 in any other case
9. What is the effect of giving a declaration in Form 15G or 15H?
When the recipient submits a declaration as per Section 197A to the payer along with PAN details, no TDS will be deducted if the following conditions are met:
- A recipient is a person other than a company or a firm
- Tax liability on total income of the previous year (PY) is NIL
- The recipient’s total income does not exceed the limit, i.e. for AY 2020-2021, it is Rs. 2,50,000 or Rs. 3,00,000 or Rs. 5,00,000 as applicable. This condition is not applicable if the recipient is a resident senior citizen
- Once the declaration is submitted to the bank, the bank will not deduct tax on the interest payment