Budget 2015-16 Rationalisation of provisions relating to deduction of tax on interest (other than interest on securities) under section 194A of the Income Tax Act,1961

Amendment in TDS provisions related to  TDS on Payment of Interest by Co-operative Societies and co-operative Banks

Section 194A(1) read with section 194A(3)(i) of the Act provide for deduction of tax on interest (other than interest on securities) over a specified threshold, i.e. Rs.10,000 for interest payment by banks, co-operative society engaged in banking business (co-operative bank) and post office and Rs.5,000 for payment of interest by other persons. Further, sub-section (3) of section 194A inter alia also provides for exemption from deduction of tax in respect of following interest payments by co-operative society:

(i) Interest payment by a co-operative society to a member thereof or any other co-operative society. [Section 194A(3)(v) of the Act]

(ii) Interest payments on deposits by a primary agricultural credit society or primary credit society or co-operative land mortgage bank or co-operative land development bank. [Section 194A(3)(viia)(a) of the Act]

(iii) Interest payment on deposits other than time deposit by a co-operative society engaged in the business of banking other than those mentioned in section 194A(3)(viia)(a) of the Act. [Section 194A(3)(viia)(b) of the Act]

Therefore, as per the provisions of section 194A(1) read with provisions of sections 194A(3)(i)(b) and 194A(3)(viia)(b), co-operative bank is required to deduct tax from interest payment on time deposits if the amount of such payment exceeds specified threshold of Rs. 10,000/-. However, as the provisions of section 194A(3)(v) of the Act provide a general exemption from making tax deduction from payment of interest by all co-operative societies to its members, the co-operative banks tried to avail this exemption by making their depositors as members of different categories. This has led to dispute as to whether the co-operative banks, for which the specific provisions of tax deduction exist in the form of section 194A (1), section 194A(3)(i)(b) and section 194A(3)(viia)(b) of the Act, can take the benefit of general exemption provided to all co-operative societies from deduction of tax on payment of interest to members. The matter has been carried to judicial forums and in some cases a view has been taken that the provisions of section 194A(3)(viia)(b) of the Act makes no distinction between members and non-members of co-operative banks for the purposes of deduction of tax, hence, the co-operative banks are required to deduct tax on payment of interest on time deposit and cannot avoid the same by taking the plea of the general exemption provided under section 1 94A(3)(v) of the Act. This is because the specific provision of tax deduction provided under section 1 94A(3)(i)(b) and 194A(3)(viia)(b) of the Act for co-operative banks override the general exemption provided to all co-operative societies for non-deduction of tax from interest payment to members under section 194A(3)(v) of the Act.

As there is no difference in the functioning of the co-operative banks and other commercial banks, the Finance Act, 2006 and Finance Act, 2007 amended the provisions of the Act to provide for co-operative banks a taxation regime which is similar to that for the other commercial banks. Therefore, there is no rationale for treating the co-operative banks differently from other commercial banks in the matter of deduction of tax and allowing them to avail the exemption meant for smaller credit co-operative societies formed for the benefit of small number of members. However, as mentioned earlier, a doubt has been created regarding the applicability of the specific provisions mandating deduction of tax from the payment of interest on time deposits by the co-operative banks to its members by claiming that general exemption provided is also applicable for payment of interest to member depositors. In view of this, it is proposed to amend the provisions of the section 194A of the Act to expressly provide from the prospective date of 1st June, 2015 that the exemption provided from deduction of tax from payment of interest to members by a co-operative society under section 194A(3)(v) ) of the Act shall not apply to the payment of interest on time deposits by the co-operative banks to its members.

However, the existing exemption provided under section 194A(3)(viia)(a) of the Act to primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank from deduction of tax in respect of interest paid on deposit shall continue to apply. Therefore, these co-operative credit societies/banks referred to in said clause (viia)(a) would not be required to deduct tax on interest payment to depositors even after the proposed amendment. Further, the existing exemption provided under section 194A(3)(v) of the Act from deduction of tax from interest paid by a co­operative society to another co-operative society shall continue to apply to the co-operative bank and, therefore, a co-operative bank shall not be required to deduct tax from the payment of interest on time deposit to a depositor, being a co-operative society.

The existing provision of TDS on payment of interest by banking company or co-operative bank applies only to the interest payment on time deposits made on or after the 1st day of July, 1995. The definition of “time deposits” provided in the section 194A of the Act excludes recurring deposit from its scope. Therefore, payment of interest on recurring deposits by banking company or co-operative bank is currently not subject to TDS. The recurring deposit is also made for a fixed tenure and, therefore, the same is akin to time deposit. It is, therefore, proposed to amend the definition of ‘time deposits’ so as to include recurring deposits within its scope for the purposes of deduction of tax under section 194A of the Act. However, the existing threshold limit of Rs 10,000 for non-deduction of tax shall also be applicable in case of interest payment on recurring deposits to safeguard interests of small depositors.

Bankwise Income to be considered for TDS deduction instead of Branch

Currently, provisions of proviso to section 194A(3)(i) of the Act provide that the interest income for the purpose of deduction of tax by the banking company or the co-operative bank or the public company shall be computed with reference to a branch of these entities. As currently, most of these entities are computerised and follow core banking solutions for crediting interest, there is no rationale for continuing branch wise calculation of interest by the entities who have adopted core banking solutions. It is, therefore, proposed to amend the provisions of section 194A of the Act to provide that the computation of interest income for the purposes of deduction of tax under section 194A of the Act should be made with reference to the income credited or paid by the banking company or the co-operative bank or the public company which has adopted core banking solutions.

TDS on interest payment on compensation amount awarded by Motor Accident Claim Tribunal at the time of payment instead of accrual

Under section 194A(3)(ix) of the Act, tax is not required to be deducted from the interest credited or paid on the compensation amount awarded by the Motor Accident Claim Tribunal if the amount of such interest credited or paid during a financial year does not exceed Rs.50,000/-. Finance (No.2) Act, 2009 amended the provisions of section 56 of the Act as well as substituted section 145A of the Act to, inter alia, provide that interest income received on compensation or enhanced compensation shall be deemed to be the income of the year in which the same has been received. However, the existing provisions of section 194A of the Act provides for deduction of tax from interest paid or credited on compensation, whichever is earlier. Section 145A (b) of the Act provides an exception to method of accounting contained in section 145 of the Act and mandates for taxation of interest on compensation on receipt basis only. Therefore, deduction of tax on such interest on mercantile/accrual basis results into undue hardship and mismatch. It is, therefore, proposed to amend the provisions of section 194A of the Income-tax Act, 1961 to provide that deduction of tax under section 194A of the Act from interest payment on the compensation amount awarded by the Motor Accident Claim Tribunal compensation shall be made only at the time of payment, if the amount of such payment or aggregate amount of such payments during a financial year exceeds Rs.50,000/-.

These amendments will take effect from 1st June, 2015.

NOTE ON RELEVANT CLAUSES  OF FINANCE BILL 2015

Clause 42 of the Bill seeks to amend section 194A of the Income-tax Act relating to interest other than interest on securities.

Under the existing provisions contained in the proviso to clause (i) of sub-section (3) of the aforesaid section, income credited or paid in respect of time deposits with a banking company or co¬operative society or deposits with a public company, as the case may be, shall be computed with reference to the branch of the banking company or co-operative society or public company, as the case may be.

It is proposed to insert a proviso after the existing proviso to the said clause (i) of sub-section (3) of the aforesaid section so as to provide that the amount referred to in the first proviso shall be computed with reference to the income credited or paid by the banking company or the co-operative society or the public company, as the case may be, where such banking company or the co-operative society or the public company has adopted core banking solutions.

The existing provisions of clause (v) of sub-section (3) of the aforesaid section provide that the provisions of sub-section (1) of the aforesaid section shall not apply to income credited or paid by a co-operative society to a member thereof or to any other co¬operative society.

It is proposed to amend the said sub-clause so as to provide that the provisions of sub-section (1) of section 194A shall not apply to income credited or paid by a co-operative society (other than a co-operative bank) to a member thereof or to such income credited or paid by a co-operative society to any other co-operative society.

It is further proposed to provide an Explanation below clause (v) of sub-section (3) of aforesaid section 194A to define the expression “co-operative bank”.

The existing provisions of clause (ix) of sub-section (3) of section 194A provides that the provisions of sub-section (1) of section 1 94A shall not apply to income credited or 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.

It is proposed to substitute the aforesaid clause so as to provide that the provisions of sub-section (1) of section 194A shall not apply to income credited by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal.

It is also proposed to insert a new clause (ixa) in sub-section (3) of section 194A to provide that the provisions of sub-section (1) of section 194A shall not apply to 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 casemay be, the aggregate of the amounts of such income paid during the financial year does not exceed fifty thousand rupees.

Explanation 1 to sub-section (3) of the aforesaid section defines the expression ‘time deposits’ for the purposes of clauses (i), (vii) and (viia) of the said sub-section (3) as deposits (excluding recurring deposits) repayable on the expiry of fixed periods. It is proposed to amend the said definition of ‘time deposits’ so as to provide that for the purposes of said clauses the expression ‘time deposits’ shall not exclude but include recurring deposits.

These amendments will take effect from 1st June, 2015.

EXTRACT OF RELEVANT CLAUSES FROM FINANCE BILL 2015

42. Amendment of section 194A.

In section 194A of the Income-tax Act, in sub-section (3), with effect from the 1st day of June, 2015,— (a) in clause (i), after the proviso, the following proviso shall be inserted, namely:—

“Provided further that the amount referred to in the first proviso shall be computed with reference to the income credited or paid by the banking company or the co-operative society or the public company, as the case may be, where such banking company or the co-operative society or the public company has adopted core banking solutions;”;

(b)      in clause (v), for the words “paid by a co-operative society to a member thereof or”, the words and brackets “paid by a co-operative society (other than a co-operative bank) to a member thereof or to such income credited or paid by a co-operative society” shall be substituted;

(c)      after clause (v), the following Explanation shall be inserted, namely:—

‘Explanation.—For the purposes of this clause, “co-operative bank” shall have the same as meaning assigned to it in Part V of the Banking Regulation Act, 1949;’;

(d)      for clause (ix), the following clauses shall be substituted, namely:–

 “(ix) to such income credited by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal;

(ixa) to such 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;”;        

(e)      in Explanation 1 below clause (xi), for the word “excluding”, the word “including” shall be substituted.

( Compiled by Taxguru Team)

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27 responses to “Section 194A- Amendment in provisions related to TDS on interest”

  1. umesh mooteri says:

    Sir,
    Thanks for the clarification on Sec.194A(3)(ix) and Sec.194A(3)(ixa) of Income Tax Act. But, the interest amount (exceeding Rs.50,000/-)is deposited by the Insurance Company in Court, which is subsequently paid to the Claimant. At what juncture Sec.194A(3)(ix) will apply and what juncture Sec.194A(3)(ixa) . Request you to please clarify.

  2. umesh mooteri says:

    Sir,
    Can you please explain the difference between Sec.194A(3)(ix) andSec.194A(3)(ixa) of Income Tax Act.

  3. Dr.Kishor Kumar Bhole says:

    Sir, Can a Senior-Citizen’s Advance TDS be debited on Estimated income from his Savings Bank A/C without his Consent/Notice if by Chance a Ceiling-Limit of Rs.3Lakh Exceeds by a Branch of Co-Op Bank”Seva-Bank” of Pune District ??? Besides instead of 10% on Exceeds Rs.30,000/- ! They debited Rs..18,130/- which is 10% of 1,80,000/- ??? Please REPLY & Justify !!!

  4. Ravindra says:

    Registered Trade Union under Act 1926 is registered on 1959. Regd. Trade Union has company fixed deposit. The interest income exceeds Rs.2,50,000/- per year. The Fixed Deposit company has asked as per CBDT Circular u/s 139(4C) of IT Act, Trade Union has to file the return of Income & Trade Union can not submit the 15G Form, hence the benefit of CBDT circulat is not available to the regd. trade union.
    As per section 10(24) serial no. 57 of IT Act Trade Union are exempted for any amount. But the Fixed Deposit Company replied to us i.e. to get the benefit under sec 10(24) will be available only if a specific exemption letter is issued from IT dept.
    Please let me know under Income Tax act, showing the statement whether trade union has to take exemption certificate from assessing officer u/s 197(1) for the interest income receive exceeding Rs.2,50,000/- per year

  5. sachin rakshit says:

    Dear Sir, kindly clarify whether a credit cooperative society which is
    not a bank has tax liability for the deposit kept with any schedule
    commercial bank it should not duducted
    ??? Kindly reply to my mail id rakshitsachin@gmail.com

  6. G Narasimhan says:

    Sir

    I have a query on tax applicability on interest income from Recurring Deposits effective 1st June 2015.

    We want to know interest to be reckoned whether from 1st June 2015 prospectively or 1st April 2015 retrospectively to be included for tax computation for FY 2015-16. Shall be thankful for your clarification.

    Regards
    Narasimhan

  7. NARAYAN NAGARSEKAR says:

    DEAR SIR
    CAN YOU PLEASE GUIDE ME ON “UNDER WHICH SEC OF IT ACT INCOME OF REGISTERED TRADE UNIONS IS TAXABLE ( INCOME FROM INTEREST ON FD AND INVESTMENT.)AND ALSO PROVISIONS IN THIS REGARD
    THANKS
    NARAYAN

  8. Uma Mahesh says:

    Is this Rs.10,000/- is applicable per a transaction or for a financial year?

  9. Parichay Mukherjee says:

    Dear Sir, kindly clarify whether a credit cooperative society which is not a bank has tax liability for the deposit kept with any schedule commercial bank ??? Kindly reply to my mail id parichaymukherjee@gmail.com. bh.kanthi@bandhanbank.com

  10. sumeet sharma says:

    Sir,
    Kindly let me know if deposit kept by cooperative bank with nationalised bank us s subject to tds or not.

  11. pradeep says:

    Dear sir
    Should co operative soceity deducte tds on fd or not according to june2015 amendment

  12. Sanjit says:

    Dear Sir,
    I left my previous Co. 2 years back and joined another Co. Could not transfer PF. This year, earlier Co. has deducted 10% TDS on interest earned on PF deposit.

    I’m income tax payee in highest slab. In my IT return, can I claim refund of this TDS amount? If yes, can U pl advise on the process?

    If not, do I have to pay balance 20% tax on the PF interest?

    Rgds,

  13. S K MEHTA says:

    income from interest on bank fixed deposit of trade union is taxable under income tax act 1961 ?

  14. dibya says:

    Dear mayuri
    Deposit with bank you are having for tax saving purpose means you get exemption on the amount you have deposited,but interest earned on that amount is taxable,hence bank is deducting tax on interest earned.

  15. Mayuri says:

    Dear CA Sir/Mam,
    I need an extended help in understanding this amended law under sec. 194A.
    I have an FD done for 5 Years (Maturing in 2019) which was done to save tax for Fin. Year 2014-15.
    And a RD for 24 Months which is matured with interest of INR 16000/2 Years.
    The bank has deducted Tax against it stating interest earned is more than INR 10,000 including FD & RD.
    My question is if Fixed Deposit is done for 5 Years to save Tax, why Bank in inclucing it while calculating clubbed interest?
    Secondly, interest on RD is also per year INR 8,000 which is not more than INR 10,000 to make such deduction.
    Bank is unable to explain me the rule & when I asked then to give me notice from RBI which states all above, Bank is unable to.
    Kindly guide as to what bank is doing is correct or not.
    Thanks in advance.
    Regards,
    Mayuri

  16. Amol Sonar says:

    dear sir,

    can you explain about ,How the TDS is to be deduct i.e. on Actual Base or Projection base

  17. Koll Venkateswarlu says:

    Deduction of Tax at source from deposits in Co-operative banks is a big blow to retired employees in industrial an other private sectors. What ever benefits at the time of retirement, they have to invest and live on the interests as Co-operative banks give better interests than nationalized banks.They don’t get pension. Government employees after retirement get pensions with increased DAs.

    This is the time RBI should make amendments for certain exemptions for the benefit of retired employees in Private sector of industrial and others.

  18. momin shafiyoddin h. says:

    94A Amendment Co Op Bank paid interest before 31st may 2015 it is liable TDS ?
    Sume Co Op Bank say that our FD withdraw before 31st may 2015, The Bank can not
    do TDS it is possible ? If you withdraw FD After 1st June 2015 are you liable TDS

  19. Subhash Jain CA says:

    TDS is not required on RD with Post Office. It is required only in case of RD with bank.

  20. hemant modi says:

    Sir,
    194A Amendment Co Op Bank paid interest before 31st may 2015 it is liable TDS ?

    Sume Co Op Bank say that our FD withdraw before 31st may 2015, The Bank can not

    do TDS it is possible ? If you withdraw FD After 1st June 2015 are you liable TDS

  21. indra mandaliya says:

    Dear Sir,

    Register trade union (Register Trade union act 1926)have fixed deposited in bank.amd it eared accrued interest above Rs. 10000/-above.Can bank deduct tds on u/s. 194A ? as because income of trade union exempted u/s. 10(24)

  22. joy joseph says:

    dear sir
    kindly describe the explanation of co-operative bank and primary credit co-operative society. AWAITING YOUR ESTEEMED RESPONSE.. THANK YOU

  23. PRITESH SHAH says:

    Dear sir,

    Kindly inform the effect of TDS deduction in Recurring Deposite interest is applicable in Post office RD schemes or not.

    Awaiting for your prompt reply

    Regards

    Pritesh shah

  24. Mahesh says:

    Dear Sir,

    Kindly clarify whether this will be applicable to existing investments by senior citizens in RD in Banks and PO and all PO schemes like MIS and NSC also. Many senior citizend have invested in such schemes due to high safety and convenience. If yes, whether form 15H can be given by those not having taxable income for RD and PO schemes.

    Thanks

  25. dr vedula gopinath says:

    dear sir

    Can you kindly enlighten tax applicability to senior citizens

    in respect of term deposits and monthly payment of interest by POST OFFICES.

    thanks vgnath@gmail.com dr vedula gopinath

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