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 –
Months | Due date |
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:
Also Read: NBFCs – Non-Compliance in Calculating Interest on FDs/RDs & TDS Deduction
Question –
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)
Also Read-
Which institutions are covered in the defination of Financial Corporation which are exempt from deduction of TDS (Sec. 194A(3)(iii)(b)), Is NBFC included in Financial Corporation.
I have allotted a plot from meerut development authority in 2011.MDA has not give possesion of plot to me till 2022,
I asked MDA about possesion than MDA replied due to farmer obstruction for higher compensation development work is not completed so MDA is not able to give possesion of plot, if I want to take my deposit amount back than I can take it without interest.
I go to the high court allahabad, where I filed a case against MDA, and demand for compensation.
Court ordered to MDA for returning my deposit amount with interest.
MDA return my money with interest after deducting 10% tax.
this interest which i have received is shown in my ITR as interest from other source which is taxable.
An Individual took a loan from NBFC, the interest paid by the individual to the NBFC, will NBFC have to deduct TDS? Even for a consumer loan to a salaried individual?
Attention -Author/ ADMN. :
Apropos of my previous comment, once again requested to clarify the point raised ; may do so, simply by way of a reply thereto!
courtesy
(in Public Interest)
Sir, Please raise specific issue so that we can edit article if required or reply.
AUTHOR/Admn.:
WRT > “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 –
At the time of credit of income to the payee’s account; or
At the time of payment in cash, cheque, draft or any other mode”.
In saying so, it stands to be inferred, that the special purport and import of the expression, – “At the time of credit of income to the payee’s account” has been elucidated in the EXplanation thereunder has been oversighted.
It is regrettable that has excaped also the attention of the thousands of the ‘viewers’ (over 2 lakhs)!
In fact, according to a very limited personal survey, there are banks and NBFCs who are known to have , for their purposes (of TDS) proceeded by blatantly ignoring the special significance/imolications of what the EXPLANATION provides ?!
Back To ADMN. , and Author – if convinced, for a review and suitable modification of the Article !
courtesy
(May have More to dilate)
Kindly read below Article on the Subject – NBFCs – Non-Compliance in Calculating Interest on FDs/RDs & TDS Deduction – https://taxguru.in/finance/nbfcs-non-compliance-calculating-interest-fds-rds-tds-deduction.html
TG TEAM/Author
Me have RAISED NO ISSUE . Have simply pointed out that in the write-up,its AUTHOR HAS OMITTED TO REFER AND DEAL WITH THE IMPLICATIONS OF THE special EXPLANATION provides. That is, TDS should be made NOT ONLY when interest is CREDITED TO “PAYEE’S ACCOUNT” BUT ALSO WHEN CREDITED TO ANY OTHER ACCOUNT (IN THE BOOKS) – such as a SUSPENSE ACCOUNT. TO BE PRECISE, example is when at the accounting year end, AN ENTRY IS PASSED FOR ACCRUAL OF ‘BROKEN BERIOD’ INTEREST- say, LESS THAN A MONTH OR A QUARTER or…..SEE ALSO MY MAIL RECENTLY SENT!
Dear sir/madam,
I have to state the following-
i)My date of birth is January 1961. For which FY I shall be treated as senior citizen for income tax purpose?
ii)We have received an email from IT dept u/s 194A informing us that we have not paid Tax on Rs.256731=00 informed by various banks. This includes an interest in Fd’s and also an interest in saving banks.
iii)Out of the above-mentioned we have already paid tax on Rs.69504 as this was mentioned in form 26 AS and filed ITR and got refund also of Rs. 4920=00
Now I am preparing revised ITR u/s 139(5), please let me know the following-
i)What amount should be shown as ‘income from other sources’ should it be Rs. 256731=00 or after excluding interest on saving banks from Rs.26731 in order to claim exemption up to Rs.10000=00 u/s 80TTA?
ii)What should we do about the IT refund of Rs.4920=00.already got?
iii)How much we should deposit tax as ‘self-assessment tax’?
Kindly reply immediately about above mentioned. Your additional advice is also welcome.
Thanks
SIR,
my production start 01.07.2020.
can interest bifurcation up to 30.06.2020 and 1.07.2020 to 31.03.2021 for capitalized interest expense ? if yes , than TDS Applicable for the period 01.04.2020 to 30.06.2020
Suppose a LLP took loan from one of its partner. whether interest payable to the partner on that loan amount is liable to tds?
MY SON INCOME FROM INTREST ON DEPOSITS IN HDFC DEPOSITS IS APPX 150000 WHETHER TDS IS DEDUCTABLE OR NOT WHOSAE TOTAL ANNUAL INCOME IS LESS THAN 500000
My internet income on Bank Fixed deposit for the financial year 2020-21 (assessment year 2021-22 would be around ₹4,00,000.
I am a senior Citizen and have submitted form 15H to the bank.
Please advise whether bank can deduct TDS on interest paid to me.
My taxable income doesn’t exceed ₹5,00,000.
Thanks
Is the TDS deducted by the bank on interest received from FDs of cooperative society ?
Is the TDS deducted by the bank on the FDs of cooperative society ?