What is Section 194A of Income Tax Act?

Section 194A of the Income Tax Act (ITA) mandates the deduction of tax at source (TDS) on all the interest payments made to resident individuals, excluding interest paid to partners of a partnership firm.

This includes TDS only on interest other than interest on securities. This section is crucial for taxpayers who earn interest income from investments, as it ensures that they comply with tax laws and pay the correct amount of tax.

Any entity other than an individual or a Hindu Undivided Family (HUF) that makes interest payments to a resident individual is liable to deduct TDS under Section 194A.

This includes banks, financial institutions, NBFCs, and other entities that pay interest on loans, deposits, and other financial products. TDS on interest on the loan is not only charged when it is secured but also on unsecured loans.

What are Section 194A TDS Rates?

The TDS rate under Section 194A is 10% if the payee has a Permanent Account Number (PAN). If the payee does not have a PAN, the TDS rate is 20%.

TDS under Section 194A is deducted when the interest is credited to the payee's account or when payment is made in cash, cheque, or other suitable modes.

Here is the section 194A threshold limit, only above this individual is liable to pay TDS.

For deposits made, TDS will only be deducted if:

The accumulated amount of interest in the relevant financial year exceeds ₹40,000 where the interest payer is Banking and Non-banking financial Institutions or co-operative banks and Post offices, where a deposit is made into it.

In the case of Senior citizens (Age- above 60 Years), the exemption limit exceeds ₹50,000.

Entities must deposit the deducted TDS by the 7th of the month for deductions made from April to February. For deductions made in March, the deposit deadline is April 30th.

The obligation to deduct TDS under Section 194A rests with the entity making interest payments, excluding those related to securities. This responsibility arises when the stipulated conditions in Section 194A for TDS deduction are satisfied.

There are several exemptions from TDS under Section 194A. These include:

• Interest paid by cooperative societies to their members.

• Interest paid to partners by partnership firms.

• Interest paid to banking institutions, Life Insurance Corporation of India (LIC), Unit Trust of India (UTI), financial corporations, and other insurance companies in India.

• Interest paid on particular government securities.

• Interest paid on certain deposits made under the National Savings Scheme.

Individuals can submit Form 15G or Form 15H to prevent TDS deduction on their interest income, subject to meeting certain conditions. Form 15G is for individuals who have no other income chargeable to tax, while Form 15H is for individuals whose total income does not exceed the basic exemption limit.

TDS may be deducted at a lower or nil rate if individuals declare their earnings using Form 15G or Form 15H, or if they obtain a certificate from the assessing officer authorising lower TDS deductions.

Taxpayers can ensure that they are compliant with Section 194A by:

• Understanding the scope of the section and the types of interest payments subject to TDS.

• Identifying the TDS rate that applies to their interest income.

• Obtaining a PAN if they do not already have one.

• Submitting Form 15G or Form 15H if they are eligible.

• Keeping track of the TDS that has been deducted from their interest income.

Here are a few case studies to illustrate how Section 194A works:

Case 1

A bank pays ₹60,000 interest to a nonsenior customer on a fixed deposit. The bank must deduct TDS at 10% since the interest amount exceeds ₹40,000, which is within the section 194A TDS limit.

Case 2

A cooperative society pays ₹10,000 interest to a member on a savings deposit. The harmonious society does not need to deduct TDS since interest paid by cooperative societies to their members is exempt from TDS.

Case 3

An individual submits Form 15G to a financial institution. The financial institution is not required to deduct TDS on the individual's interest income since the individual has declared that their total income does not exceed the basic exemption limit.

Section 194A is an essential section of the ITA that helps taxpayers comply with tax laws and pay the correct amount of tax on their interest income. However, did you know that TDS is not levied on premiums paid for health insurance plans?

Yes, that’s true! Now, when you realise that, you can check medical insurance plans out for their tax and other coverage benefits. With TATA AIG, you can buy health insurance plans for family or for a particular family member.

This keeps you and your loved ones safe and your health insurance premium TDS-free. By understanding these provisions, taxpayers can avoid unnecessary TDS deductions and take advantage of available exemptions and benefits along with getting suitable health insurance coverage.

Is interest paid to partners subject to TDS under Section 194A?

No, when a partnership firm disburses interest to its partners, TDS deduction under Section 194A is not applicable. This exemption recognises the distinctive nature of such financial transactions.

Is interest from savings banks subject to TDS under 194A?

No, interest earned on savings bank accounts is not covered under the provisions of Section 194A. TDS rules apply primarily to interest income from fixed deposits and recurring deposits.

Which interest incomes are not covered under Section 194A?

Exceptions to TDS under Section 194A include interest earned on a savings account, interest on income tax refunds, interest paid by a partnership firm to its partners, and interest paid to recognised financial entities such as banks, LIC, UTI, or insurance companies.