Section 194A of ITA is responsible for the tax deduction at sources on interests that are earned on investment options other than securities. Taxpayers must make it a point to become familiar with various aspects of this section of ITA to understand the provisions better. Also, having a fair understanding of the same will help taxpayers to make the most of the tax exemptions under Section 194A.
As discussed, this Section of Income Tax Act is concerned with the deduction of interest accrued on sources other than securities.
One must note that if the provisions of Section 194A apply to specific earnings, the same will be subjected to tax deduction at a rate of 10%. However, if individuals fail to provide their PAN, the deductor has to deduct 20% tax as per the 194A TDS rate.
The Section 194 payment is made out in the form of –
One must note that interest paid out to the owners of a partnership firm does not come under this section and hence does not attract TDS deductions.
These pointers highlight the fundamental provisions of Section 194A –
It is important to remember that an individual or a HUF has to deduct TDS if the gross receipts or business turnover exceeds Rs. 1 crore (business) or Rs. 50 lakh (profession) in the preceding year.
To streamline the process of paying 194A TDS, entities need to find out more about the circumstance of TDS deductions and also about the exemptions.
Look at this table to gain an idea about the rate of TDS that come under this section.
|Deductor||TDS rate||Threshold (Rs.)|
|Banking institutions (when PAN is shared)||10%||Rs. 10000|
|Banking institutions (when PAN is not shared)||20%||Rs. 10000|
|Financial institutions (with PAN)||10%||Rs. 5000|
|Financial institutions (without PAN)||20%||Rs. 5000|
Note: In the FY 2020 until March 31st 2021 there was a relief plan due to Covid, and the TDS rate was reduced from 10% to 7.5%.
Under Sec 194A of the Income Tax Act TDS is deducted in these situations –
Entities that are entrusted with the task to deduct TDS on earnings generated on instruments other than securities have to deposit it by pre-determined dates. Even when the accumulated earnings have not been credited to the customers’ account, the entities have to deduct a TDS.
Tax Deducted during the month of April to February can be deposited on or before the 7th of the next month. The tax deducted in the month of March is to be deposited on or before the 30th of April.
Suppose a banking institution pays Rs. 15000 to a customer on a fixed deposit. Since the accumulated earnings are more than Rs. 10000, the banking institution has to deduct TDS at the rate of 10% from the accrued interest amount.
These pointers below enumerate the exemptions that belong under Section 194A of the Income Tax Act.
This table below highlights the cases under which TDS is not deducted –
|Category of payer||Total interest amount for regular individuals||The amount for senior citizens|
|Banking institutions||Rs. 40000||Rs. 50000|
|Co-operative societies||Rs. 40000||Rs. 50000|
|Post office||Rs. 40000||Rs. 50000|
|Other cases||Rs. 5000||Rs. 5000|
Other than these, individuals can submit Form 15G or Form 15H (as applicable) to prevent TDS deduction on their earnings. However, certain there are some conditions that a taxpayer needs to meet to avail of exemptions.
TDS is deducted at a lower or nil rate in these situations –
One must note that no tax is deducted only if some specific criteria are met including –
2. When individuals submit Form 13 (as per Section 197) as an application to the assessing officer to avail a certificate.
Such a certificate will authorise the payer to deduct taxes at a lower rate. Individuals can apply for such an application at any time before the TDS is deducted. However, one must note that individuals who do not have PAN cannot apply for such a certificate. Once individuals have gathered these and other vital information of Section 194A of Income Tax Act, they can streamline the process of claiming tax benefits quickly.
The individual who makes the payment of interest, other than interest on securities, is liable to deduct TDS if the conditions are mentioned for deduction in the Section.
No, according to Section 194A, interest paid by a partnership firm to its partners is exempt from TDS deduction.
The general rule is that if the amount of such interest paid or credited exceeds Rs.5000 in a fiscal year, the payer must deduct TDS. However, whether the payer is a bank, cooperative society, or post office, TDS will be deducted only if the interest exceeds Rs. 40,000 / 50,000 for senior persons in a year.
No, this limit only applies to fixed deposits and recurring deposit interest. TDS restrictions do not apply to savings bank account interest.
Section 2 sub-section 22 deals with the income tax act’s definition of dividends.