Section 194A of the Income Tax Act, 1961 governs the deduction of tax at source (TDS) on interest payments other than interest on securities. This provision ensures that the tax liability on such interest income is collected at the source itself. In this article, we will provide a detailed overview of Section 194A, focusing TDS on interest earned from fixed deposits, bonds, interest paid on an unsecured loan, interest paid on loans and advances, and interest paid to Non-Banking Financial Companies (NBFCs). We will explore the applicability of TDS, rates, exemptions, and compliance requirements under this section.
Section 194A mandates that any person responsible for paying interest (other than interest on securities) exceeding the specified threshold amount is required to deduct TDS at the prescribed rates before making the payment. The TDS amount is then deposited with the Income Tax Department on behalf of the recipient.
The present article helps to understand the provisions attached with Section 194A of the Income Tax Act, 1961.
Basic Provisions of Section 194A –
Essential features of section 194A are summarized hereunder –
Point of time when TDS is to be deducted –
The Deductor liable to deduct TDS as per provisions of section 194A is required to deduct TDS within earlier of the following dates –
The Intricacies of TDS on Provisional/Suspense Entry: In adherence to TDS rules, the moment an amount is credited to a suspense or provisional account, it is deemed equivalent to being credited to the payee’s account. Consequently, TDS becomes applicable and must be deducted at source. This implies that even provisions recorded in the books of accounts, where TDS provisions are applicable, necessitate tax deduction at source.
The Provisional Entry and Reversal Process: To ensure proper accounting practices, a provisional entry is made prior to posting the actual entry. This provisional entry establishes the TDS liability associated with the transaction. Subsequently, when the actual entry is posted, the provisional entry is reversed, reflecting the correct TDS calculations and adjusting the liability accordingly. This two-step process facilitates accurate TDS accounting.
Calculation of TDS on Provisional Entry: During the provisional entry stage, the TDS amount is calculated as per the applicable rates and regulations. This ensures that the provisional TDS liability is accurately recorded and reflected in the financial records. However, it is crucial to note that upon the posting of the actual entry, the system should not recalculate TDS, as it has already been deducted during the provisional entry stage.
Rate of TDS on interest other than interest on securities –
If the provisions of section 194A of the Income Tax Act gets attracted, the Deductor is liable to deduct TDS on interest other than interest on securities @10%.
However, if the Permanent Account Number is not furnished, in that case, the Deductor would be liable to deduct TDS @20% i.e., maximum marginal rate.
The Time limit of depositing the deducted TDS –
The Deductor who has deducted TDS as per provisions of section 194A are required to deposit the same within the following due dates –
|April to February||7th of the next month|
|March||On or before 30th April|
Threshold Exemption limit under section 194A –
TDS is not to be deducted under the following case –
|Amount||Category of Payer|
|An aggregate amount of interest doesn’t exceed INR 40,000 [INR 50,000 in case of a senior citizen]||Bank|
|An aggregate amount of interest doesn’t exceed INR 40,000 [INR 50,000 in case of a senior citizen]||Co-operative Society|
|An aggregate amount of interest doesn’t exceed INR 40,000 [INR 50,000 in case of a senior citizen]||Post office|
|An aggregate amount of interest doesn’t exceed INR 5,000||In any other case|
List of interest exempted under Section 194A –
Some of the important lists of interest which is exempted under section 194A are –
TDS on Interest from Fixed Deposits:
TDS on Bonds:
TDS on Interest Paid to NBFCs:
What is Section 194A?
Section 194A covers provisions relating to deduction of TDS on interest other than interest on securities. If the provisions gets attracted, the TDS @10% is to be deducted by the Deductor.
What is 194A payment?
Section 194A payment is in the form of interest (other than interest on securities). Interest payment like interest on fixed deposit, interest on any loan or interest on recurring deposits are covered within the same.
Is TDS deducted on interest paid to bank?
No, when interest is paid to bank against the loan taken, TDS provisions are not applicable, and hence TDS is not deducted on interest paid to the bank.
Who is liable to deduct TDS under 194A?
The person who is paying interest (other than interest on securities) is liable to deduct TDS if the provisions of section 194A get attracted.
Is TDS deducted on interest to partners?
No interest paid by the partnership firm to partners are not covered within the purview of section 194A, and hence TDS is not required to be deducted.
Conclusion: Section 194A of the Income Tax Act ensures the deduction of TDS on interest other than interest on securities. It imposes the responsibility on the payer to deduct TDS on interest earned from fixed deposits, bonds, and interest paid to NBFCs. It is essential for both payers and recipients of interest income to comply with the provisions of this section to ensure proper tax compliance. Here are the key compliance requirements:
In conclusion, complying with the provisions of Section 194A is essential to ensure proper deduction and deposit of TDS on interest payments other than interest on securities. By fulfilling the compliance requirements, both payers and recipients can avoid penalties, maintain accurate financial records, and contribute to a transparent tax system. It is advisable to consult a tax professional or refer to the relevant provisions of the Income Tax Act for specific guidance and clarification regarding TDS on interest income.
Readers to note article is republished with changes on 18.05.2023 explaining requirement of TDS on Provisional entries)
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|Section 194 – TDS on dividend|
|Section 194B and Section 194BB – TDS|
|Section 194C – TDS on Contractors|
|Section 194D – TDS on insurance commission|
|Section 194DA – TDS in respect of Life Insurance Policy|
|Section 194E – TDS on payment to Non-resident Sportsmen or Sports Association|
|TDS under Section 194EE and Section 194F|
|Section 194G TDS on Commission on Sale of Lottery Tickets|
|Section 194H – TDS on Commission or Brokerage|
|Section 194I of Income Tax Act, 1961 – TDS on Rent|
|Section 194IA TDS on transfer of immovable property|
|Section 194IB – TDS on Rent paid by Individual / HUF|
|Section 194LA: Payment of Compensation on acquisition of certain immovable property|
|TDS under Section 194LB, 194LBA, 194LBB and 194LBC|
|Section 194LC: TDS on income by way of interest from an Indian Company or a business trust|
|Section 194LD TDS on income by way of interest on certain bonds and Government Securities|
|Section 194J TDS on Fees for Professional or Technical Services|
|Section 194N – TDS on Cash Withdrawals|
|Section 194M: TDS on Payment of certain sum by certain Individual / HUF|
|Section 195 TDS on payment of any other sum to a non-resident|