Section 194A of Income Tax Act: Your Guide to Understand TDS on Interest Income

Among the various sections under the Income Tax Act, Section 194A is specifically distinct because it focuses on the Tax Deduction at Source (TDS) on interest income, excluding interest on securities. This section plays an essential role in ensuring that tax on interest income is collected at the source itself, thus preventing tax evasion.  

With this comprehensive blog post about Section 194A of the Income Tax Act, we will attempt to understand the key aspects of this section and explore its applicability to make its provisions clearer and more effective in your overall financial journey. 

What is Section 194A Under Income Tax Act?

Section 194A of the Income Tax Act requires Tax Deducted at Source (TDS) on interest income from sources other than securities. If you earn interest from these sources and exceed a specified threshold, then a 10% tax is deducted from the payer before paying you. However, if you do not provide your Permanent Account Number (PAN), then the tax rate increases to 20%. Certain exemptions are there such as interest paid to a partnership firm’s owners are not required to pay TDS under Section 194A. 

Mentioned below are the types of interests covered under Section 194A-

• Interest on Fixed Deposits
• Interest on Recurring Deposits
• Interest on Loans and Advances 
• Interest on Savings Accounts in banks, cooperative societies, and post offices. 
• Interest on Unsecured Loans
• Interest from Deposits with Companies

What are the Limits and Conditions for Applicability of Section 194A?

For banks, cooperative societies, and post offices

• TDS is deducted if the total interest paid or credited during a financial year exceeds the limit of INR 40,000. 
• For senior citizens, no TDS will be deducted on interest earned till INR 50,000, as applicable from financial year 2018-19. 

For other non-bank entities

• TDS is deducted if the total interest paid or credited during a financial year exceeds INR 50,000. 

When is TDS Deducted Under Section 194A?

TDS under Section 194A of the Income Tax Act is deducted by entities such as an individual or Hindu Undivided Family (HUF) whose income exceeds INR 1 crore (in business) and INR 50 lakhs (in service), and other specified assesses when paying interest income. It is deducted at the time of actual payment or when interest is credited to the recipient’s account. This ensures that tax on interest earnings from sources such as fixed deposits, loans, and advances are collected at the source.  Even if the interest amount gets credited to accounts such as Interest Payable Accounts or Suspense Accounts, they are still considered credited to the payee’s account for TDS purposes. 

What is the Rate of TDS Under Section 194A?

Based on PAN Card Availability

• If the recipient provides a PAN card, then the interest income is subjected to a 10% TDS rate.
• In case of the unavailability of a PAN card, the TDS rate increases to 20%. 

Based on Minimum Income

• Minimum income must exceed INR 50,000 as ensured by entities other than banks, for the application of TDS. Below this limit, TDS is not deducted.
• However, banks, cooperative societies engaged in banking and post offices must deduct TDS if interest income exceeds INR 40,000 annually, which exceeds to INR 50,000 for senior citizens.
• No additional taxes such as education tax, secondary and higher secondary education tax, or surcharge tax are added to the TDS rates as specified under Section 194A. 

What are the Exemptions where TDS is not Applicable Under Section 194A?

• Interest paid by firms to partners on their capital.
• Interest income from cooperative societies to members, as defined under the Banking Regulation Act.
• Interest income from banking companies, cooperative societies engaged in banking, financial corporations under state, provincial, or central acts, LIC, UTI, insurance companies, and other institutions exempted by the Central Government.
• Interest on deposits under central government schemes notified in the Official Gazette.
• Interest on certain deposits with banks initiated before July 1, 1995, excluding time deposits.
• Interest on deposits with agricultural societies, primary credit societies, cooperative land mortgage banks, or cooperative land development banks.
• Interest income credited under various tax-related provisions or from Motor Accidents Claims Tribunal compensation.
• Interest on Zero-Coupon Bonds paid by public sector companies, infrastructure funds, or scheduled banks.

Thus, Section 194A of the Income Tax Act plays an important role in ensuring upfront collection of taxes on interest earnings, excluding interest on securities.