Section 194A – TDS on Interest – 5 Important Provisions

Section 194A of the Income Tax Act, 1961, deals with the TDS on interest income other than interest on securities. This provision mandates that any person, other than an individual or Hindu Undivided Family (HUF) not liable for tax audit, must deduct TDS on interest payments exceeding Rs. 5,000 in a financial year (Rs. 40,000 for banks and certain financial institutions, and Rs. 50,000 for senior citizens). The current TDS rate under Section 194A is 10%. This ensures that the government collects tax revenue on interest income at the source, promoting tax compliance and reducing tax evasion. Let us now delve into the detailed explanation of section 194A pertaining to TDS on interest.

Section 194A – Deductors and Deductees

As explained above, TDS has to be deducted by any person, other than an individual or Hindu Undivided Family (HUF) not liable for tax audit. This implies than the deductor is any person, other than an individual or HUF whose total sales or gross receipts does not exceed Rs. 1 crore or Rs. 50 lakhs respectively in the preceding financial year.

The deductee is any resident individual.

Section 194A – TDS on interest threshold limits

As mentioned above, TDS has to be deducted on interest payments exceeding Rs. 5,000 in a financial year (Rs. 40,000 for banks and certain financial institutions, and Rs. 50,000 for senior citizens). This implies that the aggregate of such interest income credited or paid or likely to be credited or paid during the financial year exceeds:-

• Rs. 40,000 where the payer is a banking company, cooperative society bank or post office. This limit is enhanced to Rs. 50,000 in case of senior citizen payees. Where the banks have adopted CBS, this limit will be considered based on the aggregate of all the accounts of the customer across branches as per Circular No. 03/2010 dated 02.03.2010.
• Rs. 5,000 in any other case.

The interest income includes the interest on time deposits such as fixed deposits and recurring deposits.

When do we have deduct TDS u/s 194A?

The TDS on interest u/s 194A has to be deducted at the time of credit or payment, whichever is earlier similar to 194C.

Rate of TDS u/s 194A

TDS on interest payments has to be deducted u/s 194A @ 10%. However, if the PAN has not been furnished by the deductee or if he is a specified person u/s 206AB, then TDS will be deducted @ 20%.

Exceptions to Section 194A

The exceptions are designed to simplify compliance and avoid undue tax burden in specific scenarios, ensuring that TDS is only applied where it is necessary and practical. TDS u/s 194A will not be deducted in the following cases:-

• The aggregate amount of interest credited or likely to be credited does not exceedRs. 5,000 in a financial year (Rs. 40,000 for banks and certain financial institutions, and Rs. 50,000 for senior citizens).
• The interest credited has been paid by a firm to a partner of the firm, being a resident. However, TDS u/s 195 will be deducted in case the partner is a non-resident.
• Any interest paid to a banking company, a cooperative society engaged in banking, or a public financial institution is not liable for deduction of TDS u/s 194A.
• Interest on certain bonds and debentures, which are specifically exempted by the government, does not attract TDS.
• Any interest paid to institutions or entities that are exempt under Section 10 of the Income Tax Act is not subject to TDS under Section 194A.
• Any interest credited or paid by the Central Government under specified schemes or savings certificates is also exempt.
• Interest paid by a cooperative society to its members or to other cooperative societies is not subject to TDS under this section.
• Interest paid to insurers, such as Life Insurance Corporation (LIC) or other insurance companies, is exempt from TDS under this section.
• Interest paid on compensation awarded by the Motor Accidents Claims Tribunal is exempt from TDS.
• Interest paid by primary agricultural credit societies or primary credit societies to their members is exempt from TDS.
• Interest paid to any institution or association that the Central Government has notified for the purpose of this section does not attract TDS.
• Interest payments made to entities notified under the provisions of this section, which are generally entities involved in infrastructural development and other specified activities, are exempt from TDS.
• Interest payments made under schemes notified by the Central Government, such as certain schemes for small savings or welfare funds, do not attract TDS.
• Interest earned on savings bank accounts held with banks, cooperative societies, or post offices is not subject to TDS under this section.
• Interest payments made by a cooperative society to another cooperative society are exempt from TDS.
• Interest on bonds issued by infrastructure debt funds or bonds which have been specifically exempted by the government from the purview of TDS.

CBDT Notification No. 110/2021

CBDT Notification No. 110/2021 dated 17.09.2021, provides an exemption from the requirement of TDS u/s 194A of the Income-tax Act, 1961. This exemption applies to interest payments made by scheduled banks to members of Scheduled Tribes residing in specified areas. However, certain conditions to be fulfilled for this exemption such as verification of the customer’s ST status, bank must report these interest payments in the TDS statements as mandated by Section 200(3) and the total interest paid should not exceed Rs. 20 lakhs in a financial year.

Avenue Super Chits Private Limited

Chit dividend paid by the chit fund company to its members is not interest and therefore TDS u/s 194A will not be deducted in such case.

Important Case Law – CIT v/s Vijaya Bank (2008)

Vijaya Bank was paying interest on deposits to its customers but did not deduct TDS on the interest paid to its members who were also shareholders of the bank. The bank argued that since the shareholders were receiving dividends and not interest, TDS under Section 194A was not applicable.

The primary issue was whether the bank was liable to deduct TDS under Section 194A on the interest paid to its members who were shareholders.

The Supreme Court held that the interest paid to shareholders, even though they were members of the bank, was subject to TDS under Section 194A. The Court observed that the nature of the payment was interest and not dividend, and thus, the bank was obligated to deduct TDS on such interest payments. This case clarified that the nature of the payment should be analyzed to determine the applicability of TDS under Section 194A. Even if the recipient is a shareholder or member of the entity making the payment, if the payment is in the nature of interest, TDS provisions under Section 194A will apply.