Section 194A Income Tax Act: TDS on Interest Income

Section 194A of the Income Tax Act is a pivotal provision focusing on the deduction of tax at source (TDS) on interest income, excluding interest on securities. Understanding Section 194A is crucial for both payers and payees to ensure compliance with the tax laws and to avoid potential penalties. By grasping the intricacies of the 194A TDS section, individuals can manage their tax responsibilities more efficiently and take full advantage of the benefits outlined in the 194A Income Tax Act.

What is Section 194A of Income Tax Act?

Section 194A of the Income Tax Act deals with the deduction of tax at source (TDS) on interest income from sources other than securities. Under this section, residents are subject to a TDS rate of 10% on interest accrued from loans, advances, fixed deposits, and recurring deposits. If the PAN is not provided, the TDS rate increases to 20%. Notably, 194A of income tax does not apply to interest paid to non-residents, which falls under Section 195. Additionally, interest paid to partnership firm owners is exempt from TDS under the 194A section in TDS.

Know More About How to File TDS Return?           

Who Is Required To Deduct TDS Under Section 194A?

TDS under Section 194A must be deducted by the payer if the interest paid, credited, or likely to be paid in a fiscal year exceeds specified thresholds. According to the 194A TDS rate, the payer is required to deduct TDS when the interest amount surpasses:

• ₹40,000 if the payer is:
  1. A financial institution, bank, or any combination of banks.
  2. A cooperative society engaged in banking activities.
  3. A post office (on deposits under schemes framed and announced by the Central Government).
• ₹5,000 in all other cases.

For senior citizens, starting from FY 2018-19, no TDS is deducted on interest earned up to ₹50,000 from the following:

1. Bank deposits.
2. Deposits with post offices.
3. Fixed-rate deposit plans.
4. Recurring deposit plans.

Fundamental Provisions of Section 194A

Here are the key provisions of Section 194A:

• Besides Hindu Undivided Families (HUF) and individuals, entities paying interest to resident individuals must deduct TDS.
• If HUFs or individuals are required to get their accounts audited under Section 44AB, they must deduct TDS on interest payouts.
• Section 194A of Income Tax does not apply to interest payments made to non-resident Indians (NRIs). TDS deductions for NRIs fall under the purview of Section 195.
• Individuals or HUFs must deduct TDS if their gross receipts or business turnover exceeds ₹1 crore (for business) or ₹50 lakh (for profession) in the preceding year.

When TDS Is Deducted Under Section 194A?

TDS under Section 194A of Income Tax is deducted in specific circumstances to ensure compliance with tax regulations. Here are the scenarios when TDS must be deducted:

• TDS is required when the income is credited to the payee’s account.
• It must also be deducted when the payment is made in cash, by cheque, draft, or any other suitable mode.

Entities responsible for deducting TDS on earnings from instruments other than securities must adhere to predetermined deposit dates. According to 194A TDS rate provisions, these entities are obligated to deduct TDS even if the accumulated earnings are not credited to the customer’s account. By understanding 194A of income tax, both payers and payees can ensure proper tax compliance and avoid penalties associated with the 194A section in TDS.

Time Limit for Depositing TDS

TDS deducted from April to February must be deposited by the 7th of the following month. For TDS deducted in March, the deadline is the 30th of April.

Examples:

• If TDS is deducted on April 25th, it must be deposited by May 7th.
• If TDS is deducted on March 15th, it must be deposited by April 30th.

Exemptions From TDS Under Section 194A

• Interest earned on savings bank accounts.
• Interest on income tax refunds.
• Interest paid by a partnership firm to its partners.
• Interest paid to banks, LIC, UTI, or insurance companies.
• Interest paid by cooperative societies to their members or other cooperative societies. However, if a cooperative society’s turnover exceeds ₹50 crore in the previous year, TDS applies if the interest paid exceeds ₹50,000 for senior citizens and ₹40,000 for others.
• Interest paid by primarily agricultural societies, primary credit societies, cooperative land mortgage banks, or cooperative land development banks on deposits.
• Interest on compensation awarded by the Motor Accidents Claims Tribunal, provided the compensation does not exceed ₹50,000.
• Interest on Zero-Coupon Bonds.

Section 194A Non-Compliance Penalties

1. Penalty under Section 271C:
   • Applicable when TDS is not deducted or is deducted at a lower rate.
   • Penalty is equal to the amount of tax not deducted.
   • Maximum penalty is the amount of tax defaulted.
2. Penalty under Section 271H:
   • Applicable for late or non-filing of TDS return.
   • Minimum penalty is ₹10,000 and can extend up to ₹1 lakh.
3. Interest under Section 234E:
   • Payable for late filing of TDS return.
   • Calculated at a specified rate for the delay period.

Other Consequences

• Recovery proceedings: The Income Tax Department can initiate recovery proceedings to recover the unpaid TDS amount, along with interest and penalties.
• Legal action: In severe cases, legal action can be taken against the defaulter.
• Reputational damage: Non-compliance with TDS regulations can damage the reputation of the business.

Conclusion

Section 194A of the Income Tax Act is a vital provision that ensures the timely deduction and deposit of tax on interest income from sources other than securities. Utilising tools like a TDS calculator and being aware of the TDS rates and threshold limits can help in accurate and efficient tax management. Compliance with Section 194A not only helps in avoiding penalties but also contributes to the overall tax revenue collection process, benefiting the economy.

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