Section 194A is a provision in the Income Tax Act that deals with the deduction of tax at source on interest income. Under this section, any person responsible for paying interest to a resident person is required to deduct tax at the prescribed rate before making the payment. The section applies to various types of interest payments, including interest on savings accounts, fixed deposits, recurring deposits, and other financial instruments.
The purpose of Section 194A is to ensure that tax on interest income is collected at the source itself, rather than waiting for the taxpayer to declare it in their tax returns. By doing so, the government can ensure timely and efficient collection of tax revenue. The section also aims to prevent tax evasion by ensuring that all interest income is subject to tax.
It is important to understand this section, as failure to comply with its provisions can lead to penalties and legal consequences. Non-compliance with Section 194A may result in interest and penalty being levied, along with disallowance of the expenditure. It is therefore essential for taxpayers to be aware of their obligations under the section and ensure compliance with the same. Additionally, understanding this section can also help taxpayers plan their investments and tax liabilities better.
II. What is Section 194A?
Section 194A is a provision under the Indian Income Tax Act, 1961 that mandates the deduction of tax at source (TDS) on interest payments. This section requires that the payer deducts tax at the applicable rate before making payments to the recipient. The TDS collected is then remitted to the government on behalf of the recipient.
Types of payments covered under Section 194A:
Section 194A covers several types of payments that are subject to TDS, including:
Interest on securities: This includes interest received on any security issued by the central or state government, such as bonds, debentures, and securities issued by local authorities.
Interest other than interest on securities: This includes interest received on fixed deposits, savings accounts, recurring deposits, loans, and advances.
When tax is to be deducted?
As per Section 194A, tax is deducted at the time of payment or credit of interest, whichever is earlier. However, in case of interest on compensation awarded by the Motor Accident Claims Tribunal, tax is deducted only at the time of payment.
For instance, suppose Essem Industries, a partnership firm, takes a loan of Rs. 8,40,000 from Mr. Kumar, and the interest on the loan for the financial year 2022-23 amounts to Rs. 84,000. Although the interest is credited to Mr. Kumar's account in March 2023, the actual payment is made in May 2023. In such a case, the liability to deduct tax arises in March 2023, as the time of credit is March 2023, and the time of payment is May 2023.
Threshold limit for TDS under Section 194A:
According to section 194A, no tax needs to be deducted if the total interest credited or paid to the payee in respect of time deposit during the financial year does not exceed a certain threshold limit. The limit varies depending on whether the payee is a senior citizen or not and the type of payer.
If the payer is a
- Banking company/
- Co-operative Society engaged in the banking business
- Post Office
If the total interest credited or paid to the payee during the financial year exceeds the threshold limit, tax needs to be deducted on the entire amount. For instance, if the interest on a loan is Rs. 8,400 and the threshold limit is Rs. 5,000, tax needs to be deducted on the entire amount of Rs. 8,400.
If the total interest credited or paid during the financial year is below the threshold limit, no tax needs to be deducted. For example, if the interest on a loan is Rs. 840 and the threshold limit is Rs. 5,000, no tax needs to be deducted.
It's important to note that the ceiling limit is not computed branch-wise if the banking company or cooperative society or public company has adopted Core Banking Solutions (CBS). Time deposits include deposits, including recurring deposits, repayable on the expiry of fixed periods.
It is important to note that the threshold limit is applicable per recipient, per financial year. This means that if a payer makes multiple interest payments to a single recipient in a financial year, the threshold limit will apply to the aggregate amount of interest paid or credited to that recipient.
Understanding the types of payments covered and the threshold limit for TDS under Section 194A is crucial for taxpayers to ensure compliance with income tax laws. Non-compliance can result in penalties, interest, and legal consequences. Therefore, it is important for taxpayers to be aware of their TDS obligations under Section 194A to avoid any potential liabilities.
III. Who is liable to deduct TDS under Section 194A?
As per Section 194A of the Income Tax Act, any person making a payment of interest is liable to deduct TDS. This section is applicable to all types of taxpayers, including individuals, companies, partnerships, etc.
When TDS is not required to be deducted:
If the payment of interest made during the financial year does not exceed Rs. 40,000, then TDS is not required to be deducted.
In case of interest paid by banks, co-operative societies, or post offices, TDS is not required to be deducted if the interest paid does not exceed Rs. 50,000 for senior citizens (i.e., individuals above 60 years of age) and Rs. 40,000 for others.
IV. Rate of TDS under Section 194A
- The rate specified in the relevant provision of the Income Tax Act
- The rate or rates in force, i.e., the rate prescribed in the Finance Act
- The rate of 20%
V. Compliance requirements under Section 194A
Consequences of not deducting TDS:
If a person responsible for deducting TDS under Section 194A fails to do so or deducts an amount less than the prescribed rate, they may be penalized. The penalty is equal to the amount of TDS that should have been deducted but was not. Additionally, interest at the rate of 1% per month or part of a month is also charged on the amount of TDS not deducted or deducted at a lower rate.
Thus, it is important for the person making payment of interest to ensure that TDS is deducted as per the provisions of Section 194A to avoid any penalties or interest charges.
- April to June: 31st July [As amended by Finance Act, 2022]
- July to September: 31st October
- October to December: 31st January
- January to March: 31st May
- April to June 15th August
- July to September 15th November
- October to December 15th February
- January to March 15th June
- Default in obtaining Tax Deduction Account Number (TAN)
- Default in deduction of tax
- Default in payment of tax to the credit of the government
- Default in furnishing the TDS return
- Default in furnishing the TDS certificate to the payee