Section 193 of Income Tax Act

Tax deduction at source, or TDS, is the key aspect of Section 193 of the Income Tax Act. Under this section, a tax called TDS is deducted from all interest earned by investing in securities like debentures, bank loans, etc., before it reaches the resident's bank account.

• Simply put, Section 193 mandates that the entity paying you the interest on securities withhold a part of your earned income at source only. Let's look at an example to understand this better.

• Ramesh invested ₹5 lakhs in a fixed deposit with XYZ Bank.

• The bank is offering an interest of 8% on the FD investment per year.

• The yearly earned interest income for Ramesh will be ₹40,000 (5 lakhs * 8%).

• Now, as per Section 193, before XYZ bank deposits the interest amount of ₹40,000 in Ramesh’s bank account, it will have to deduct tax at source based on the applicable TDS rate.

• Let us assume that the rate is 10%.

• The interest income earned by Ramesh after TDS will be ₹36,000 {40,000 - (40,000*10%)}.

• The bank kept ₹4,000 as TDS and paid the rest to Ramesh.

Applicability - Under Section 193 of the Income Tax Act, the rules of TDS are applicable to all the interest income earned only by residents of India when they invest in securities like -

• Bonds and debentures issued by other companies.

• Government securities like Provident Fund, Fixed Deposits, etc.

• Other deposits with financial institutions and banks.

TDS Rate - The TDS rate for Section 193 of the Income Tax Act is 10%. However, this rate is only applicable if the payee has a PAN. If no PAN details of the payee are available, the rate of 10% will be changed to the highest marginal tax rate.

Due Date and Penalties - The due date for deduction is finalised depending on when the money is credited to the receiver’s account. Failure to comply will attract significant penalties.

For instance, if the amount is credited in March, it must be paid by the end of April of the same year. However, if the credit takes place in any other month, the payee or deductor must deposit the TDS within 7 days of the end of that particular month. For example, TDS deducted in February must be deposited by 7 March.

Role of TDS Deductions - Any entity paying interest to an Indian resident against their investment in any security is responsible for TDS deductions as per Section 193.

Role of TDS Filing - The deductor is responsible for filing TDS returns on time and making the correct payment towards all TDS deductions made on interest income to the government.

• Any resident holding a National Defence Bond with an interest rate of 4.25%.

• Any interest earned on a savings bank account is not included under Section 193.

• Any loan taken from non-banking entities or individual payers is not eligible for TDS. However, other sections under the Income Tax Act can come into effect.

• In some cases, there is a set exemption limit for TDS deduction under Section 193. This is very case-specific and limited to only interest income. If the earned income is below the exemption limit, no TDS will be deducted. An example of this can be some specific government bonds.

• As per the updates regarding the amendment in Section 193 of the Income Tax Act in April 2023, for all Indian residents holding dematerialised securities that are listed on the stock exchange in India, there will be no TDS deduction on the interest income.

• If the payee submits a Form 15H or 15G, TDS deductions will not be applicable.

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