Section 194A

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.

What is 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 –

• Interest on loans and advances
• Earnings on fixed deposits
• Interest on recurring deposits

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. 

Fundamental Provisions of 194 A

These pointers highlight the fundamental provisions of Section 194A –

• Besides HUF and individuals, entities that pay interest to resident individuals are required to deduct TDS.
• If at any time HUF or individuals have to get their accounts audited under the clauses of 44AB, they have to deduct TDS on interest payout.
• One must note that Section 194A of Income Tax Act does not apply to interest payouts made to NRIs. TDS deductions concerning NRIs are dealt with under the purview of Section 195.

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.

194A TDS Rate – The Threshold and Accompanying Rate

Look at this table to gain an idea about the rate of TDS that come under this section. 

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%.

When can TDS be Deducted Under Section 194A?

Under Sec 194A of the Income Tax Act TDS is deducted in these situations –

• When income is credited to the payee’s account.
• When payment is made in the form of cash, cheque, draft and other suitable modes.

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. 

Time Limit for Depositing 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. 

Exemption from TDS

These pointers below enumerate the exemptions that belong under Section 194A of the Income Tax Act.

• The interest paid by co-operative society to fellow members.
• Interest paid to partners by partnership firms.
• Earnings are paid to bank institutions, Life Insurance Corporation Unit Trust of India, financial corporations or other companies engaged in the insurance business in India. 

This table below highlights the cases under which TDS is not deducted –

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.

Circumstances When TDS is Deducted at a Lower or NIL Rate

TDS is deducted at a lower or nil rate in these situations –

1. When individuals declare their earnings in Form 15G and Form 15H as per the norms of Section 197A. 

One must note that no tax is deducted only if some specific criteria are met including – 

• The declarant is an individual and not a company.
• The tax on the previous year’s total income is NIL.
• If the total income of a regular individual is less than the exemption limit.
• When the declaration is submitted to the bank, the institution may not declare taxes on interest payment. 

  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.