In India, Tax Deducted at Source (TDS) is a method the government uses to collect taxes directly from your income before you receive it. This applies to different types of income, like salaries, dividends, bonuses, commissions, and interest from deposits.
Section 194A of the Income tax act, 1961, talks about tax to be deducted on interest payments.
Interest payments are essential for banks, investments, and the savings of everyday people in India. So, it’s really important for everyone to understand provisions of Section 194A.
Let’s look closer at TDS on interest income under section 194A and what taxes you need to pay.
This article will explore the following key aspects:
- What is TDS?
- Basics of TDS on interest income under Section 194A
- TDS rates
- Section 194A threshold limits for TDS on interest income
- How to avoid tax deductions under section 194A
- Importance of TDS certificates and filing your income tax return
- Tips for filing your income tax return
- FAQs about Section 194A of the Income Tax Act, 1961
What is TDS in income tax?
- TDS stands for Tax Deducted at Source.
- It’s a method to collect income tax in India. A part of your income is deducted as tax before you even receive it.
- Tax deducted at source provisions applies to various incomes like salaries, rent, professional fees, contractors, dividends and more.
- Employers, banks, and other financial institutions deduct tax at source and pay it to the government.
- Different types of payments have different TDS rates.
The Basics of TDS on Interest Income
Understanding TDS on interest income is essential for managing your finances effectively.
Keeping track of your interest income and TDS deductions can help you plan your taxes better and avoid surprises during the financial year. Always consult a tax advisor for personalized guidance based on your financial situation.
Interest income subject to tax deduction at source under Section 194A includes:
- Fixed deposits (FDs)
- Recurring deposits (RDs)
- Loans
- Advances (other than those provided by banks)
TDS under section 194A is applicable on interest payments made by banks, financial institutions, and companies.
Tax deduction on interest from securities is also included in the TDS rules, but the details about it are found in Section 193 of the Income Tax Act,1961.
Section 194A is for residents of India, which means its rules do not apply to Non-Resident Indians. Payments made to NRIs are also subject to TDS deductions, but this is explained in Section 195 of the Income Tax Act.
Who Deducts TDS Under Section 194A?
As per section 194A, tax must be deducted by:
- Individuals or Hindu Undivided Families (HUF) if their business sales or receipts exceed ₹1 crore, or ₹50 lakhs for services. Others in this category are not required to deduct tax under Section 194A.
- Other entities like partnerships, companies, associations of persons (AOP), or bodies of individuals (BOI), but they must meet certain conditions set by the Income Tax Act, 1961.
When is TDS Deducted Under Section 194A?
TDS under Section 194A must be deducted in the following ways:
- The entities mentioned earlier need to deduct tax at source either when they pay the interest (in cash, cheque, draft, or any other method) or when the interest is credited to the payee’s account—whichever happens first.
- If the interest is credited to accounts like Interest Payable Accounts or Suspense Accounts, it is still considered credited to the payee’s account.
What is the TDS Rate on Interest Income Under Section 194A?
Here are the current TDS rates for interest income:
- If the recipient has a PAN Card: tax is deducted at a rate of 10%.
- If the recipient does not have a PAN Card: tax is deducted at a rate of 20%.
No surcharge, health and education cess shall be added to the above rates. Hence, tax will be deducted at source at the basic rate.
Threshold Limits for TDS on Interest Income
A threshold limit is the maximum amount of interest income you can earn before tax is deducted. If your interest income is below this limit, no tax will be taken out.
If the interest is paid by entities other than banks, TDS is only collected if the interest exceeds ₹5,000. If it’s below that, no TDS is deducted.
For banks, cooperative societies, or post offices, TDS applies only if the interest exceeds ₹40,000. This means, if you earn interest over ₹40,000, TDS will apply. But if your interest is ₹40,000 or less, you won’t have any tax deducted.
For senior citizens, the limit is ₹50,000 for fixed deposits (FDs) and recurring deposits (RDs).
These rates and limits can change based on new government regulations.
Also, no additional taxes (like education tax or surcharges) are added to the above TDS rate.
Illustrations
Illustration 1: If a bank pays ₹90,000 in interest to a customer with a PAN Card, tax is deducted at 10% on that amount, regardless of whether the customer withdraws the interest, since it has been credited to their account.
Illustration 2: A non-senior customer of a bank receives ₹70,000 in interest from a fixed deposit. Since this amount exceeds ₹40,000, the bank must deduct tax at a rate of 10%.
Illustration 3: A member of a cooperative society receives ₹10,000 in interest from their savings deposit. Since cooperative societies are not required to deduct tax on interest paid to members, no TDS will be applicable in this case.
Illustration 4: A person submits Form 15G to a financial institution, declaring that their total income is below the basic exemption limit. As a result, the financial institution is not required to withhold TDS on their interest income.
How to Avoid Tax Deduction on Interest Income
If your total income is below the taxable limit, you can avoid tax deduction on interest income by informing the bank.
You do this by filling out Form 15G or Form 15H, depending on your age:
- Form 15G: For individuals under 60 years old.
- Form 15H: For senior citizens (60 years and older).
These forms let the bank know your income is below the taxable limit, so they won’t deduct TDS. If tax is deducted, the bank will give you a TDS certificate (Form 16A), which shows how much tax was taken out. This certificate is important when you file your income tax return.
Time Limit to Deposit TDS under Section 194A
The deadlines for depositing TDS on interest income are as follows:
- For TDS deducted from April to February: It must be deposited by the 7th of the following month.
- For TDS deducted in March: It must be deposited by April 30.
Examples:
- If TDS is deducted on April 25, it must be deposited by May 7.
- If TDS is deducted on March 15, it must be deposited by April 30.
TDS Certificates and Filing Your Income Tax Return
After tax is deducted, the bank gives you a TDS certificate (Form 16A) that shows how much tax was taken out.
This certificate is important when you file your income tax return. You need to report your total interest income and the tax deducted to ensure everything matches up.
If the tax deducted is more than what you owe in taxes, you can claim a refund when you file your return. If it’s less than what you owe, you’ll need to pay the difference.
Always keep records of your interest income, TDS certificates, and the forms you submitted (15G/15H). These documents are important for accurate tax filing and for any future reference.
Tips for Filing Your Income Tax Return
The tax deducted amount can be claimed when you file your income tax return. Ensure to report your total interest income and the tax deducted to avoid any discrepancies.
If the tax deducted at source exceeds your tax liability, you can claim a tax refund during your income tax return filing. Conversely, if the tax deducted at source is less than your liability, you may need to pay the difference.
It’s crucial to file your income tax returns accurately, including any TDS deducted. Ensure all documents, like the TDS certificate, are kept safe for reference.
What are the exemptions from TDS under Section 194A?
TDS does not need to be deducted in the following cases:
- If the payee is a banking company, cooperative society (engaging in banking), or a post office, and the interest is less than ₹50,000 for resident senior citizens or ₹40,000 for others.
- If the taxable interest amount is ₹5,000 or less when the interest is paid by entities other than banks.
- Partners: No TDS when a firm pays or credits interest to a partner on their capital.
- Cooperative Societies: Interest paid by a cooperative society (not a cooperative bank) to a member or another cooperative society.
- Banking Companies and Financial Institutions: Interest paid to:
- A banking company under the Banking Regulation Act.
- A cooperative society engaged in banking.
- Any financial corporation established by state or central law.
- The Life Insurance Corporation of India (LIC).
- The Unit Trust of India.
- Other insurance companies.
- Any other institutions exempted by the central government.
- Government Schemes: Interest from various Central Government deposit schemes notified in the Official Gazette.
- Savings Accounts: Interest from savings accounts in banks or banking companies (opened before July 1, 1995) is exempt from TDS.
- Agricultural and Cooperative Societies: Interest on deposits with:
- Agricultural societies.
- Primary credit societies.
- Cooperative land mortgage banks or development banks.
- Cooperative societies (other than those mentioned above) for deposits made after July 1, 1995.
- Government Compensation: Interest on amounts awarded by the Motor Accidents Claims Tribunal, provided the total income for the year does not exceed ₹50,000.
- Zero-Coupon Bonds: Interest from zero-coupon bonds paid by public sector companies or specific infrastructure funds.
- Other Specific Exemptions: Interest mentioned under Section 10(23FC) of the Income Tax Act of 1961.
These exemptions ensure that certain interest payments are not subject to TDS deductions under Section 194A.
Understanding TDS on interest income under Section 194A is crucial for effective financial management and compliance with tax regulations. By knowing TDS rates, limits, and the required forms, you can handle your taxes easily and avoid surprises. Keep your financial documents organized and consider getting professional advice when necessary.
Tax laws can be complicated, and everyone’s financial situation is different. It’s a good idea to talk to a tax advisor for personalized help. They can ensure you follow tax rules and make the most of your tax planning.
Frequently Asked Questions (FAQs)
What is Section 194A?
Section 194A pertains to the rules regarding TDS (Tax Deducted at Source) on interest payments, specifically excluding securities. This section covers various types of interest income, such as that earned from fixed deposits, recurring deposits, and unsecured loans.
Essentially, it ensures that tax is collected at the source when individuals or entities earn interest from these financial instruments, helping the government to collect tax revenue efficiently.
Who needs to deduct TDS under Section 194A?
TDS must be deducted by any entity or individual making interest payments, with the exception of individuals and Hindu undivided families (HUFs).
However, even individuals and HUFs must deduct TDS if they operate a business or profession with gross receipts exceeding Rs. 1 crore or Rs. 50 lakhs, respectively.
This rule helps ensure that larger entities contribute to tax collection while smaller ones are given some relief.
What is the limit for TDS on interest?
TDS is taken from the interest you earn when it exceeds ₹40,000 for most individuals. If you are a senior citizen (60 years or older), this limit increases to ₹50,000. For other situations, like specific accounts, TDS applies if interest goes over ₹5,000. However, interest earned from savings accounts is not taxed this way.
Is interest from savings accounts subject to TDS under Section 194A?
No, the interest you earn from your savings account is not subject to TDS, which means the bank doesn’t deduct any tax from it. This rule applies only to interest earned from fixed deposits (FDs) or certain other types of interest, where the bank is required to deduct a portion for tax purposes if the interest exceeds a certain limit.
So, if you have money in a savings account, you get to keep all the interest without any tax being taken out.
Is TDS deducted on interest paid to partners?
No, when a partnership firm pays interest to its partners, it doesn’t need to deduct any TDS (Tax Deducted at Source). This means that the firm can pay the full amount of interest to the partners without having to take any tax out first. This exemption is allowed under the law to simplify transactions within partnerships. So, partners receive their interest in full without any tax deductions.
A new section 194T is introduced with effect from 01/04/2025, have a look at it to know more.
When is tax deducted at NIL under Section 194A?
Tax will not be deducted if you submit a declaration using Form 15G (or Form 15H for senior citizens) along with your Permanent Account Number (PAN). This applies under the following conditions:
- You are not a company or firm.
- Your total income for the financial year is zero or below the exemption limit (for 2024-25, this is ₹2,50,000, ₹3,00,000, or ₹5,00,000, depending on your situation). This rule does not apply to senior citizens. You must submit two copies of Form 15G or 15H, and if the depositor passes away, nominees can submit the declaration to receive payment without tax.
Can I apply to lower the TDS deduction rate on interest income?
Yes, you can apply to reduce the TDS deduction rate on your interest income. You can submit this application anytime before the tax is deducted, and you must have a PAN.
The process involves applying to the assessing authority of the Income Tax Department, which may issue a certificate stating a lower TDS rate or that no TDS will be deducted.
This is governed under Section 197 of the Income Tax Act of 1961. The certificate is valid from the issue date until the end of the financial year and cannot be backdated.
What is the TDS limit on interest?
For Section 194A:
- Banks, Cooperative Societies, and Post Offices: TDS is deducted if the interest exceeds ₹40,000 for most payees and ₹50,000 for resident senior citizens.
- Other Cases: The limit is ₹5,000. Additionally, interest from savings accounts is not subject to TDS under this section.
Who is liable to deduct TDS on interest?
The person or entity making payments (like salaries, commissions, professional fees, interest, or rent) is responsible for deducting a percentage of tax before paying the recipient.
Is TDS applicable on savings account interest?
While interest on savings accounts is taxable, TDS is not deducted under Section 194A. Instead, under Section 80TTA, you can claim a deduction of up to ₹10,000 per year on savings account interest.
What percentage of TDS is deducted?
TDS under Section 194A is usually deducted at 10%. If the payee does not provide a PAN, the rate increases to 20%.
When is TDS not required to be deducted?
Under Section 194A, if the payer is an individual or HUF and their sales or receipts are below ₹1 crore (for businesses) or ₹50 lakhs (for services), they are not required to deduct TDS.