1) Who is responsible for tax deduction (payer)?
Following persons are responsible to deduct tax at source on interest other than interest on securities to a resident person –
- Any person, other than Individual or HUF; or
- An individual or a HUF, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed Rs. 1 crore in case of business or Rs. 50 lakh in case of profession during the financial year immediately preceding the financial year in which such interest is credited or paid.
Note: No tax shall be deducted at source if during the financial year, if interest payable by the payer to payee does not exceed ₹ 5,000. Therefore if any partnership firm, LLP, Company, AOP, society pays interest exceeding the threshold limit, it is required to deduct TDS.
LIABILITY TO DEDUCT TAX AT SOURCE
BY INDIVIDUAL AND HUF
- Liability to deduct tax at source under section 194A, 194C, 194H, 194I and 194J of Income Tax Act, 1961 was first introduced by the Finance Act, 2002 by inserting various proviso to the respective sections.
Proviso to section 194A(1), Proviso to Section 194C(1), Second Proviso to 194H(1), Second Proviso to Section 194I(1), Second Proviso to 194J(1) were inserted by Finance Act, 2002 w.e.f. 01-06-2002
“Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under section 44AB (a)/(b) during the financial year immediately preceding the financial year in which such sum is credited or paid, shall be liable to deduct income-tax under this section.”
- Finance Act, 2020 amended all the above sections w.e.f. 01-04-2020, and after amendment, above proviso reads as under:
Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the one crore rupees in case of business or fifty lakh rupees in case of profession [Substituted by FA, 2020 w.e.f. 01.04.2020] during the financial year immediately preceding the financial year in which such sum is credited or paid, shall be liable to deduct income-tax under this section.
- Impact of Amendment
> The effect of above amendment is that individual or Hindu undivided family are required to deduct tax at source under section 194A, 194C, 194H, 194I and 194J if total sales, gross receipts or turnover exceed
(A) one crore rupees in case of business or
(B) fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in such sum is credited or paid.
> As a result, the individual or HUF carrying on business and whose total sales, gross receipts or turnover exceeds Rs. 1 crore but does not exceed Rs. 2 crore in preceding financial year and opted for section 44AD of the Act are now liable to deduct tax at source under section 194A, 194C, 194H, 194I and 194J w.e.f. 01-04-2020.
> Similarly, the individual or HUF engaged in plying, hiring and leasing of goods carriages and whose total sales, gross receipts or turnover exceeds Rs. 1 crore in preceding financial year and opted for section 44AE of the Act are now liable to deduct tax at source under section 194A, 194C, 194H, 194I and 194J w.e.f. 01-04-2020.
ILLUSTRATION–
Mr. A, proprietor of AB enterprises made turnover of ₹ 150 lakhs during previous year 2019-20, his turnover for the year ended 31-03-2021 was ₹ 85 lakhs. Decide whether he is liable to deduct tax at source under section 194A in PY 2020-21?
Since Mr. A’s turnover exceeds ₹ 100 lakhs in the immediately preceding financial year i.e. FY 2019-20, he is liable to deduct tax at source under section 194A in the previous year 2020-21, irrespective of his turnover being less than ₹ 100 lakhs in the Financial year 2020-21. He will not be required to deduct tax for the FY 2021-22 as his turnover for the FY 2020-21 is below ₹ 100 Lakhs.
2) Who is the recipient?
A resident person
3) What is the nature of payment covered?
Interest other than interest on securities
4) When is tax to be deducted?
At the time of credit or payment, whichever is earlier.
5) What is the rate of tax deduction?
i) 10% (7.5% w.e.f. 14.05.2020 to 31.03.2021)
ii) 20% (if no PAN is furnished)
No surcharge, plus Health & Education Cess shall be added to the above rates. Hence, tax will be deducted at source at the basic rate.
6) When TDS on Interest (other than Interest on Securities) under section 194A not deductible?
TDS under section 194A is not deductible where the aggregate amount of interest credited/paid (or likely to be credited/paid) during the FY does not exceed the amount given below:
| Payer | Threshold limit (₹) (w.e.f. 01.04.2019) | Threshold limit (₹) for Senior Citizen (w.e.f. 01.04.2018) |
| Banking company (on time deposit) | 40,000 | 50,000 |
| Co-operative society carrying on banking business (on time deposit) | 40,000 | 50,000 |
| Co-operative whose turnover exceeds Rs 50 Crores during the previous financial year | 40,000 | 50,000 |
| Post office (on SCSS) | 40,000 | 50,000 |
| Any other person | 5,000 | 5,000 |
Time deposits shall include recurring deposits within its scope for the purposes of deduction of tax under section 194A (w.e.f. 01.06.2015). However, the existing threshold limit of ₹40,000 for non-deduction of tax shall also be applicable in case of interest payment on recurring deposits to safeguard interests of small depositors.
7) How threshold limit on interest income under section 194A computed?
Until 31st May, 2015, the threshold limit was computed with reference to the income credited/paid by a branch of the banking company or co-operative society, as applicable.
W.e.f. 1st June 2015, the computation of interest income for the purposes of deduction of tax under section 194A should be made with reference to the income credited/paid by the banking company or the co-operative society or the public company (i.e. all branches) which has adopted core banking solutions.
8) When provisions of under section 194A are not applicable?
Tax u/s 194A is not deductible in the following cases:
1) The aggregate amount of interest credited/paid (or likely to be credited/paid) during the FY does not exceed the specified threshold limit as given in the above table.
2) Interest is paid/credited to any banking company, co-operative bank, public financial institutions, LIC, UTI, an insurance company, co-operative society carrying the business of insurance or notified institutions.
3) Interest is paid/credited by the firm to its partner(s).
ILLUSTRATION–
M/s. X & Co., partnership firm, pays ₹ 15000 as interest on capital to partner Mr. R, a resident in India and ₹ 25000 as interest on capital to partner Mr. N, a non-resident.
In such a case, as per section 194A tax is not to be deducted from interest paid or payable by a partnership firm to its partner, who is resident in India. Hence, the firm need not deduct tax at source from payment of interest to its partner, Mr. R.
However, payment of interest by the firm to its non-resident partner is not governed by Section 194A. The same is governed by Section 195, which requires deduction of tax at source from interest paid or payable to any non-resident.
4) Interest is paid/ credited in respect of deposits under the schemes of Post Office (Time Deposits), Post Office (Recurring Deposits), Post Office Monthly Income A/c, Kisan Vikas Patra, NSC VIII Issue, Indira Vikas Patra. Interest on PPF account is exempt u/s 10. Hence no TDS required.
5) Interest paid/credited in respect of deposits (by non-members) with a primary agricultural credit society or primary credit society or co-operative land mortgage bank or co-operative land development bank. In order to extend the scope of this section to interest paid by large co-operative society, it is amended to provide that a co-operative society referred to in sub section (3)(v) or (viia) shall be liable to deduct income-tax, if-
a. the total sales, gross receipts or turnover of the co-operative society exceeds ₹ 50 crore during the financial year immediately preceding the financial year in which the interest is credited or paid; and
b. the amount of interest, or the aggregate of the amount of such interest, credited or paid, or is likely to be credited or paid, during the financial year is more than ₹ 50,000 in case of payee being a senior citizen and ₹ 40,000, in any other case.
6). Interest paid/credited by Central Govt. under different provisions of Direct Taxes.
7). Interest paid/credited on compensation awarded by the Motor Accidents Claim Tribunal if the aggregate amount does not exceed ₹50,000. Threshold limit of ₹50,000 is applicable separately where interest is to be shared by 2 or more claimants. (w.e.f. 1st June 2015, deduction of tax u/s 194A from interest payment on the compensation amount awarded by the Motor Accident Claim Tribunal shall be made only at the time of payment, if the amount of such payment or aggregate amount of such payments during the FY exceeds ₹50,000.)
8). Income paid/payable by an infrastructure capital company/fund or public sector company in relation to zero coupon bonds.
9). Interest paid/payable by an Offshore Banking Unit on deposits made (or borrowings) on/after Apr 1, 2005, by a person who is resident but not ordinarily resident in India
10). Interest referred to in section 10(23FC)*.
| *Section 10(23FC)-
Any income of a business trust by way of interest received or receivable from special purpose vehicle. Explanation.—For the purposes of this clause, the expression “special purpose vehicle” means an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be |
11). Amendment w.e.f 01.04.2021 – Tax shall not be deducted on income in relation to zero coupon bond issued by infrastructure debt fund.
9) When is tax deducted at nil rate or lower rate?
A. When a declaration is submitted in form 15G/15H u/s 197A:
If a declaration is submitted u/s 197A by the recipient to the payer along with his/her PAN, then no tax is deductible.
B. When an application is submitted in form 13 u/s 197:
As per provisions of section 197, the recipient can apply in form no.13 to the Assessing Officer to get a certificate authorizing the payer to deduct tax at lower rate (or deduct no tax, if certain conditions are satisfied). There is no time limit for application and it can be filed at any time before actual deduction of tax. If the recipient does not have PAN, he cannot apply for the certificate.
The certificate shall be issued, directly to the person responsible for paying income, on a plain paper, under an advice to the applicant. The certificate cannot be issued with retrospective effect. The recipient may furnish copy of such certificate to the person responsible for paying the income for lower/no deduction of tax at source.
10) TDS under Section 194A on Interest payable by consignors to their commission agents
Tax is to be deducted at source even where such interest is paid under an arrangement whereby the commission agent retains for himself/herself the interest due to him/her at the time of paying to the consignor the moneys due to him/her on account of the consignment.
11) TDS under Section 194A on Cheque discounting charges
Provisions of sec 194A are not applicable in case of cheque discounting charges as such charges are different from interest payments.
12) Whether Tax shall be deducted under section 194A of the act on interest on Fixed Deposits made in the name of Registrar General of Court?
- The CBDT has made following observation in its Circular No. 23/2015, dated 28-12-2015 on the above issue:
In the case of UCO Bank in Writ Petition No. 3563 of 2012 (available on NJRS at 2014) and CM No. 7517/2012 vide judgment dated 11/11/2014, the Hon’ble Delhi High Court has held that the provisions of section 194A do not apply to fixed deposits made in the name of Registrar General of the Court on the directions of the Court during the pendency of proceedings before the Court. In such cases, till the Court passes the appropriate orders in the matter, it is not known who the beneficiary of the fixed deposits will be. Amount and year of receipt is also unascertainable. The Hon’ble High Court thus held that the person who is ultimately granted the funds would be determined by orders that are passed subsequently. At that stage, undisputedly, tax would be required to be deducted at source to the credit of the recipient. The High Court has also quashed Circular No. 8 of 2011.
- Clarification from CBDT:
The Board has accepted the aforesaid judgment. Accordingly, it is clarified that interest on FDRs made in the name of Registrar General of the Court or the depositor of the fund on the directions of the Court, will not be subject to TDS till the matter is decided by the Court. However, once the Court decides the ownership of the money lying in the fixed deposit, the provisions of section 194A will apply to the recipient of the income.
13. In whose name TDS shall be made when interest income accrued to minor child and both the parents have deceased?
The Principal Director General of Income tax (Systems) has, in exercise of the powers delegated by the CBDT under Rule 31A (5), specified that in case of minors where both the parents have deceased, TDS on the interest income accrued to the minor is required to be deducted and reported against PAN of the minor child unless a declaration is filed under Rule 37BA (2) that credit for tax deducted has to be given to another person.
14. Whether a partnership firm is liable to deduct Tax on a sum paid as interest on loan borrowed from Indian branch of a foreign bank?
Section 194A provides that tax is not required to be deducted at source from interest credited or paid to any banking company to which the Banking Regulations Act, 1949 applies. A foreign bank operating in India is governed by the Banking Regulations Act, 1949. Therefore, a partnership firm is not required to deduct tax at source from interest on loan payable to Indian Branch of the Foreign Bank.
15. Whether Tax is required to be deducted on interest on deposits made under Capital Gains Accounts Scheme,1988 where depositor has deceased?
TDS on interest on deposits made under Capital Gains Accounts Scheme, 1988 where depositor has deceased-Notification No. 8/2017, dated 13-09-2017 It has been brought to the notice of CBDT that in cases of deceased depositor who has made deposits under the Capital Gains Accounts Scheme, 1988; the banks are deducting TDS on the interest earned on such deposits in the hands of the deceased depositor and issuing TDS certificates in the name of the deceased depositor, which is not in accordance with the law. Ideally in such type of situations, the TDS certificate on the interest income for and upto the period of death of the depositor is required to be issued on the PAN of the deceased depositor and for the period after death of the depositor is required to be issued on the PAN of the legal heir. Under Rule 31A(5) of the Income-tax Rules, 1962, the DGIT (Systems) is authorised to specify the procedures, formats and standards for the purposes of furnishing and verification of the statements or claim for refund in Form 26B and shall be responsible for the day-to-day administration in relation to furnishing and verification of the statements or claim for refund in Form 26B in the manner so specified. In exercise of the powers delegated by the CBDT under Rule 31A(5), the PDGIT (Systems) has specified that in case of deposits under the Capital Gains Accounts Scheme, 1988 where the depositor has deceased:
(i) TDS on the interest income accrued for and upto the period of death of the depositor is required to be deducted and reported against PAN of the depositor, and
(ii) TDS on the interest income accrued for the period after death of the depositor is required to be deducted and reported against PAN of the legal heir, unless a declaration is filed under Rule 37BA(2) to that effect.
16. Whether Tax is required to be deducted where interest is paid for delayed payments of trade liability?
Interest paid for delayed payments of trade liability is out of ambit of section 2(28A).
2(28A) “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised ;
From the aforesaid provisions of section 2(28A) of the Act, it may be seen that ‘Interest’ contemplated thereunder, is payable in respect of ‘Moneys borrowed’ or ‘Debt incurred’.
In support of our query we can also submit the following arguments-
(i) As per section 61 of the Sale of Goods Act, 1930, the interest payable for the delay in payment of sale consideration of the goods sold, will be of the nature of damages or special damages and obviously, the same will not fall within the purview of the definition of ‘Interest’, as contemplated under section 2(28A) of the Act and accordingly, no tax will be deductible at source under Chapter XVII-B of the Act, in respect thereof.
Besides, in case of suit filed by the seller of goods, the interest payable for the delay in the payment of sale consideration of the goods, will form part of the judgement-debt, which is not liable to TDS, under the provisions of Chapter XVII-B of the Act.
(ii) The interest payable by the purchaser for delay in payment of purchase consideration of goods, will partake the nature and character of purchase consideration in the hands of the purchaser. This view is supported by the judgement of Bombay High Court, in the case of CIT Vs Vidyut Corporation [2010] 324 ITR 221 (Bom).
Further, no tax is deductible at source under Chapter XVII-B of the Act, in respect of payment by way of purchase consideration of goods on the part of the purchaser thereof. Therefore, no tax will be deductible at source, in respect of the aforesaid interest payable by the purchaser for delay in payment of purchase consideration of goods.
(iii) Besides, interest payable for delay in payment of purchase consideration, in respect of a capital asset, being part of purchase consideration of the capital asset, will not be liable to TDS, under the provisions of Chapter XVII-B of the Act.
On the same analogy, the interest payable by the purchaser for delay in payment of purchase consideration of goods will also not be liable to TDS, under the provisions of Chapter XVII-B of the Act.
(iv) Further, in the light of the judgement of the Mumbai Bench of the Tribunal, in the case of Central Bank of India Vs JCIT [2006] 284 ITR (AT) 240 (Mum), the debt incurred, if at all, in respect of sale / purchase consideration of goods, will be quite different from a debt created between the lender and borrower of money.
Therefore, the debt incurred in respect of the sale / purchase consideration of goods, will not fall within the purview of the expression, ‘Debt incurred’, as contemplated under section 2(28A) of the Act.
Extract of Section 194A TDS on Interest (other than Interest on Securities)
194A. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :
Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed [one crore rupees in case of business or fifty lakh rupees in case of profession] during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under this section.]
Explanation.—For the purposes of this section, 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 and the provisions of this section shall apply accordingly.
(2) [Omitted by the Finance Act, 1992, w.e.f. 1-6-1992.]
(3) The provisions of sub-section (1) shall not apply—
(i) where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, does not exceed—
(a) [forty] thousand rupees, where the payer is a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution, referred to in section 51 of that Act);
(b) [forty] thousand rupees, where the payer is a co-operative society engaged in carrying on the business of banking;
(c) [forty] thousand rupees, on any deposit with post office under any scheme framed by the Central Government and notified by it in this behalf; and
(d) five thousand rupees in any other case:
Provided that in respect of the income credited or paid in respect of—
(a) time deposits with a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or
(b) time deposits with a co-operative society engaged in carrying on the business of banking;
(c) deposits with a public company which is formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;
the aforesaid amount shall be computed with reference to the income credited or paid by a branch of the banking company or the co-operative society or the public company, as the case may be :
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:
Provided also that in case of payee being a senior citizen, the provisions of sub-clause (a), sub-clause (b), and sub-clause (c) shall have effect as if for the words “[forty] thousand rupees”, the words “fifty thousand rupees” had been substituted.
Explanation.[***]
(ii) [***]
(iii) to such income credited or paid to—
(a) any banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies, or any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank), or
(b) any financial corporation established by or under a Central, State or Provincial Act, or
(c) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), or
(d) the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963), or
(e) any company or co-operative society carrying on the business of insurance, or
(f) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette: [Provided that no notification under this sub-clause shall be issued on or after the 1st day of April, 2020;]
(iv) to such income credited or paid by a firm to a partner of the firm;
(v) to such 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;
Explanation.—For the purposes of this clause, “co-operative bank” shall have the same meaning as assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949);
(vi) to such income credited or paid in respect of deposits under any scheme framed by the Central Government and notified by it in this behalf in the Official Gazette;
(vii) to such income credited or paid in respect of deposits (other than time deposits made on or after the 1st day of July, 1995) with a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act);
(viia) to such income credited or paid in respect of,—
(a) deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank;
(b) deposits (other than time deposits made on or after the 1st day of July, 1995) with a co-operative society, other than a co-operative society or bank referred to in sub-clause (a), engaged in carrying on the business of banking;
(viii) to such income credited or paid by the Central Government under any provision of this Act or the Indian Income-tax Act, 1922 (11 of 1922), or the Estate Duty Act, 1953 (34 of 1953), or the Wealth-tax Act, 1957 (27 of 1957), or the Gift-tax Act, 1958 (18 of 1958), or the Super Profits Tax Act, 1963 (14 of 1963), or the Companies (Profits) Surtax Act, 1964 (7 of 1964), or the Interest-tax Act, 1974 (45 of 1974);
(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;
(x) to such income which is paid or payable by an infrastructure capital company or infrastructure capital fund or [infrastructure debt fund or] a public sector company or scheduled bank in relation to a zero coupon bond issued on or after the 1st day of June, 2005 by such company or fund or public sector company or scheduled bank;
(xi) to any income by way of interest referred to in clause (23FC) of section 10:
[Provided that a co-operative society referred to in clause (v) or clause (viia) shall be liable to deduct income-tax in accordance with the provisions of sub-section (1), if—
(a) the total sales, gross receipts or turnover of the co-operative society exceeds fifty crore rupees during the financial year immediately preceding the financial year in which the interest referred to in sub-section (1) is credited or paid; and
(b) the amount of interest, or the aggregate of the amounts of such interest, credited or paid, or is likely to be credited or paid, during the financial year is more than fifty thousand rupees in case of payee being a senior citizen and forty thousand rupees in any other case.]
Explanation 1.—For the purposes of clauses (i), (vii) and (viia), “time deposits” means deposits (including recurring deposits) repayable on the expiry of fixed periods.
[Explanation 2.—For the purposes of this sub-section, “senior citizen” means an individual resident in India who is of the age of sixty years or more at any time during the relevant previous year.]
(4) The person responsible for making the payment referred to in sub-section (1) may, at the time of making any deduction, increase or reduce the amount to be deducted under this section for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year.
(5) The Central Government may, by notification in the Official Gazette, provide that the deduction of tax shall not be made or shall be made at such lower rate, from such payment to such person or class of persons, as may be specified in the said notification.
Explanation.—[Omitted by the Finance Act, 1992, w.e.f. 1-6-1992.]
(Republished with amendments)
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Will the interest payment to a NBFC under Direct Assignment deal attract the provisions of TDS u/s 194A.
We are paying out interest to a NBFC on a monthly basis without deducting TDS. However can we deduct TDS on interest so paid annually and deposit the same?
in my opinion for nbfc you have to pay full amount of interest and principal, and additionally deduct the tds amount and pay. after that you can submit the form 16A to the nbfc and get the refund of your tds.