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Section 194A of the Income Tax Act deals with Tax Deducted at Source (TDS) on interest income other than interest on securities
In this article, we’re going to explore what Section 194A of the Income Tax Act is, when and how this TDS is deducted, and the rate of taxes deducted under this section. We will also understand more about the workings of this section with respect to your ITR filing.
Section 194A of the Income Tax Act, 1961
In India’s Income Tax Act, Section 194A governs Tax Deducted at Source (TDS) on interest income, excluding interest earned from securities.
This means that when a resident taxpayer (except for partners in a firm) receives interest payments, the entity paying the interest (called the deductor) might be required to withhold a portion of the interest amount as tax at source.
It is worth noting that Section 194A TDS is applicable only to a resident of India, and that any interest applicable to non-residents is out of the purview of this section. The payment of interest to a non-resident is covered by the provisions of Section 195 of the Income Tax Act, 1961.
What is interest income under this Section defined as?
Examples of interest income covered under Section 194A include interest earned on fixed deposits (FDs), debentures, and loans (excluding loans from partnership firms). However, interest on savings bank accounts, income tax refunds, and interest paid by partnership firms to partners are not subject to this TDS deduction.
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When is this Section applicable for TDS deduction?
Like we noted before, this TDS deduction applies specifically when interest payments are made to resident individuals. Here’s a breakdown of how this might function in different circumstances:
- For banks, cooperative societies with banking activities, and the Post Office for Central Government deposit schemes: TDS applies if the interest paid or credited in a financial year exceeds ₹40,000.
- For any other deductors (companies, non-banking financial institutions etc.): TDS applies if the interest paid or credited in a financial year exceeds ₹5,000.
- Senior citizens are eligible for an exemption under this section. No No TDS is deducted on interest earned up to ₹50,000 in a financial year for such taxpayers.
It is also worth noting that your PAN card is an important document when filing your taxes. If you fail to furnish your PAN card to the deductor, this can affect the TDS rate, which is usually higher.
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TDS rates applicable under Section 194A of the Income Tax Act
These are the rates applicable under Section 194A of the Income Tax Act:
- If you’ve furnished your PAN, the tax rate is 10%. In case you’ve not furnished your PAN for whatever reason, the tax rate is 20%.
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How to avoid paying TDS deductions under this section
Fill out Form 15G (for individuals with no taxable income)
This form serves as a declaration to the deductor that your total income during the financial year is below the taxable limit. By submitting Form 15G, you are essentially claiming an exemption from TDS at source.
This form is only valid for the specific financial year in which it is submitted. You will need to submit a fresh Form 15G each year if you want to continue avoiding TDS on interest income.
Fill out Form 15H
This form is specifically for senior citizens (residents of India) to claim exemption from TDS on their interest income. Similar to Form 15G, it’s a declaration to the deductor that your age qualifies you for the exemption under Section 194A.
Frequently Asked Questions
If TDS is deducted in error, you can claim a refund by filing your income tax return. You will need to include details of the TDS deducted, such as the TAN (Tax Deduction and Collection Account Number) of the deductor and the challan details (if available).
The deadlines for depositing TDS vary depending on the amount deducted and the month of deduction. It’s important for the deductor to comply with these deadlines to avoid any penalties.
No, Section 194A applies to interest income received from sources within India. Interest income earned from deposits or investments held abroad may be subject to different tax rules depending on the country and any applicable tax treaties.
Currently, there is no facility to submit Form 15G or 15H electronically. You need to download the prescribed forms, fill them out manually, and submit them physically to the deductor.
If you receive interest income jointly with another person, the TDS applicability and exemption limits are determined based on each individual’s PAN details and their eligibility (e.g., senior citizen status).