Introduction

The provisions of tax deducted at source presently apply to several payments like salary, interest, commission, brokerage, professional fees, royalty, etc.

In this part, you can gain knowledge on TDS on interest other than interest on securities;

 

TDS from interest other than interest on securities (Section194A)

Section 194A deals with the provisions relating to TDS on interest other than on securities. Tax is to be deducted under section 194A, if interest (other than interest on securities) is paid to a resident.

Thus, the provisions of section 194A are not applicable in case of payment of interest to a non-resident.

Payments made to non-residents are also covered under TDS mechanism, however, tax in such a case is to be deducted as per section 195.

Illustration – 1
Essem Enterprises, a partnership firm took a loan of Rs. 8,40,000 from a person resident in India. Interest on loan for the financial year 2023-24 amounted to Rs. 84,000. Should the firm deduct tax at source from the interest?
**
Tax is to be deducted under section 194A on interest (other than interest on securities). Tax is to be deducted if the interest is paid to a resident. In this case, the firm has paid interest (other than interest on securities) to a resident and hence, the firm has to deduct tax under section 194A from interest of Rs. 84,000 paid by it

Who is deductor under section 194A

Every person (i.e. the payer) other than an individual or a Hindu undivided family (HUF), who is responsible to pay interest (interest other than on securities) to a resident, is liable to deduct tax at source under section 194A.

However, an individual or a HUF, whose total sales, gross receipts or turnover from the business or profession carried on by him/it exceeds Rs. 1 crore in case of business and Rs. 50 lakhs in case of a profession during the financial year immediately preceding the financial year in which the aforesaid amount is credited or paid, shall be liable to deduct tax under section 194A

 

Illustration – 1
Mr. Kumar is running a plastic factory under proprietorship. The total turnover of the factory during the financial year 2022-23 amounted to Rs. 84,00,000. On 1-4-2023, he took a loan from his friend who is residing in Mumbai (the funds were used in business).
Interest on loan for the financial year 2023-24 amounted to Rs. 50,000. Should Mr. Kumar deduct tax from interest of Rs. 50,000?
**
As per section 194A, an individual or a HUF has to deduct tax from interest (other than interest on securities) if his turnover or gross receipts, during the preceding financial year exceeds Rs. 1 crore in case of business and Rs. 50 lakhs in case of a profession.

Thus, if in the financial year 2022-23, turnover or gross receipts of Mr. Kumar exceeds this limit, then he will be liable to deduct tax at source on interest of Rs. 50,000 to be paid by him in the financial year 2023-24.

In this case, the turnover of Mr. Kumar for the financial year 2022-23 was Rs. 84,00,000 which was below Rs. 1,00,00,000.
As the turnover or gross receipts of Mr. Kumar doesn’t exceed the prescribed limit of Rs. 1 crore, he is not liable to deduct tax at source in respect of interest paid by him during the financial year 2023-24.

 

When tax is to be deducted under section 194A

As per section 194A, tax is to be deducted at the time of payment or credit of interest (to any account by whatever name called), whichever is earlier.

In case of interest on compensation awarded by Motor Accident Claims Tribunal, tax is to be deducted at the time of payment (TDS applies only if interest exceeds Rs. 50,000).

 

When no tax is to be deducted?

1. No tax is required to be deducted if aggregate amount of interest credited or paid to the payee in respect of time deposit during the financial year doesn’t exceed the following limit:

	Threshold limit if Payee is
Payer	Senior Citizen	Others
Banking Co.	50,000	40,000
Co-operative Society engaged in banking Business	50,000	40,000
Post Office	50,000	40,000
In any other case	5,000	5,000

The ceiling limit as specified above shall not be computed branch-wise if such banking company or co-operative society or public company has adopted Core Banking Solutions (CBS). For the above purposes “time deposits” means deposits including recurring deposits repayable on the expiry of fixed periods.

2. No deduction of tax shall be made under this section in the case of an individual, who is resident in India, if such individual furnishes to the payer, a declaration in writing in Form 15G/15H, as the case may be, to the effect that his income is below exemption limit. The provisions in this regard are as follows:

1. Declaration (in duplicate) is to be made in Form No. 15H when the recipient is a senior citizen and in Form No. 15G when the recipient is other than senior citizen.
2. Declaration in Form No. 15G/15H can be made only by an individual resident in India.
3. Declaration in Form No. 15G/15H can be made, if the annual interest does not exceed the exemption limit (i.e. Rs.2,50,000 or Rs. 3,00,000 or Rs. 5,00,000, as the case may be).
4. However, this condition is not applicable in case of a senior citizen (i.e. resident individual of at least 60 years of age) i.e. a resident senior citizen can furnish declaration in form 15H even if annual interest likely to be paid to him exceeds the exemption limit of Rs. 2,50,000 or Rs. 5,00,000, as the case may be, provided the tax payable on his total income after considering the rebate under section 87A is nil.
5. The tax payable on total income of the year should be “Nil”.

The payer who receives declaration in Form No. 15G/15H shall be required to upload details of such declarations on quarterly basis on the e-filing site (www.incometax.gov.in) under his digital signature within:
1. 15 days from the end of first, second and third quarter
2. 30 days from the end of fourth quarter.

 

Rate of TDS under section 194A

As per section 194A read with Part II of First Schedule to Finance Act, tax is to be deducted @ 10% from the amount of interest. However, if the payee does not furnish his Permanent Account Number (PAN), then the payer has to deduct tax at the higher of
following:

 At the rate specified in the relevant provision of the Income-tax Act.
 At the rate or rates in force, i.e., the rate prescribed in the Finance Act.
 At the rate of 20%.

 

Exemption list under section 194A

1. In cases where a firm is either crediting or paying interest to a partner on their capital.
2. Interest paid to any banking company to which the Banking Regulation Act, 1949, applies, or any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank).
3. Interest paid to any financial corporation established by or under a Central, State or Provincial Act.
4. Interest paid to the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956.
5. Interest paid to the Unit Trust of India established under the Unit Trust of India Act, 1963.
6. Interest paid to any company or co-operative society carrying on the business of insurance.
7. Interest paid to any other institution, association or body or class of institutions, associations or bodies which the Central Government may notify on or before 31-03-2021.
8. Interest 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.
9. Interest credited or paid in respect of deposits notified by the Central Government. Interest credited or paid in respect of 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.
10. Interest credited or paid by the Central Government under any provision of Income-tax Act, 1961 or Wealth-tax Act, 1957.
11. Interest 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
12. Interest paid by special purpose vehicle to business trust as given in section10(23FC)

 

Payment of tax under section 194A

Tax deducted from interest by the non-Government deductor is to be paid to the credit of the Central Government by the following due dates:

Tax deducted during the month of April to February should be paid to the credit of the Government on within 7 days from the end of the month in which the tax is deducted.

Tax deducted during the month of March should be paid to the credit of the Government on or before 30th day of April.

 

Issuance of TDS certificate

Every deductor has to furnish a TDS certificate to the deductee in Form No. 16A (for tax deducted on payments other than salary). The certificate should be issued on quarterly basis by following dates:

Quarter	Due date for Non-Government deductor
April to June	15th August
July to September	15th November
October to December	15th February
January to March	15th June

The certificate should be downloaded from http://contents.tdscpc.gov.in

 

Furnishing the TDS return

Every deductor who has deducted tax at source has to furnish the details of tax deducted by him to the Government. These details are to be furnished to the Government in the prescribed form.

These details are to be furnished on quarterly basis.

The due dates for filing the quarterly TDS return by a non Government deductor are as per table given below :

Quarter	Due date of filing of TDS return
April to June	31st July
July to September	31st October
October to December	31st January
January to March	31st May

 

Disallowance of expenses due to non-deduction of tax at source under section 194A

As per section 40(a)(ia), any sum payable to a resident, which is subject to deduction of tax at source, would attract 30% disallowance while computing income chargeable to tax under the head “Profits and gains of business or profession”:

If tax is deductible atsource but is not deducted.

If tax is deducted during the year, and the same is not paid on or before the due date of filing of return of income specified under section 139(1).

In other words, if tax is deducted during the year and the same is paid on or before the due date of filing the return as specified in section 139(1), then the concerned expenditure will be deductible in the year in which such expenditure is incurred.

However, any payment disallowed by aforesaid provision, shall be allowed as a deduction in computing the income of the year in which such tax deducted has been paid to the Government