Direct and Indirect Taxes in India
April 18, 2018
Tax Deduction and Collection Account Number
April 19, 2018

Section 194A – TDS on Interest

Last Update Date : April 04, 2019
Estimated Read Time: 5 min

There are different ways of collecting taxes (Self-assessment tax, Advance tax, etc.) which are calculated at the end of the year. But the Government of India found a loop into this system of collecting the tax. Many individual taxes were not collected by Government so this concept so TDS was introduced so that the payer will pay the tax on behalf of the payee. In this guide, we will cover the topic of TDS on Interest.

Interim Budget 2019 Update

The Government has proposed to amend section 194A by increasing the threshold for TDS deduction from Rs 10,000 to Rs 40,000.

What is Section 194A?

Section 194A deals with the provisions relating to TDS on interest other than on securities. Tax is to be deducted under section 194A if interest (other than interest on securities) is paid to a resident.

Who should Deduct Tax under Section 194A?

Every payer who is responsible for paying interest (interest other than on securities) to a resident, other than an individual or a HUF (Hindu undivided family), is liable to deduct tax at source under section 194A.

An individual or a HUF is liable to deduct TDS under section 194A if such individual or HUF was liable to get his/its accounts audited under section 44AB* in the preceding financial year.

*Section 44AB Income tax act require tax audit if gross receipts from business or profession exceed the prescribed limit.

How to Compute the Amount of Interest Paid?

The payer / deductor deduct TDS, but if the amount is deductible only if the amount of interest paid during the preceding year is more than Rs 10,000 in case of banks and Rs 5,000 in other cases.

But it’s not so simple to arrive at the TDS amount. Here below are some points to be considered while estimating TDS.

Cumulative Interest

While calculating the interest paid the payer has to calculate the total amount paid to the payee. For example, If the interest payable in the month of June of the preceding year is Rs 2,000 then no TDS will be deducted. But if it’s in the month of September, and the cumulative amount is Rs 6,000 then the payee / deductee (other than the bank) would have to deduct TDS on Rs 6,000 @10% for September month.

Branch Neutral

While calculating TDS the banks have to consider all the total interest payment made. For example, he / she has a fixed deposit in all different branches of the same bank. So, while calculating the TDS the cumulative amount of interest paid is to be considered.

TDS to be deducted on Interest accrued

The deductor is required to pay TDS when the interest is accrued regardless of whether the same is paid or not if the deposit is for more than one year and the interest is compounded.

When is Tax not Deductible?

  • In the financial year, if the aggregate amount of interest is not greater than Rs. 5,000, then no tax is deducted. In case of interest paid by banks on the time of deposits or a co-operative society carrying on businesses of banks on the time of deposit and also in case of the post office where interest is collected on deposits can exceed the limit from Rs 5,000 to Rs 10,000 under Senior Citizens Saving Scheme Rules, 2004. The limit of Rs 5,000 will be increased to Rs 50,000 in case of Interest on compensation awarded by Motor Accident Claims Tribunal
  • No deduction of tax shall be made under this section in the case of an individual, who is resident in India if such individual furnishes to the payer, a declaration in writing in
    Form 15G/15H to the effect that his income is below exemption limit.
  • Section 194A does not apply to interest credit or paid by a partnership firm to its partners. Thus, in this case, the firm is not liable to deduct tax from interest paid to partners.
  • The payee has obtained a certificate from the Assessing Officer for no deduction or lower deduction of tax.
  • Few other instances where no tax is to be deducted are as follows:
  1. Interest paid to LIC which is established under the Life Insurance Corporation Act, 1956. And also, interest paid to any company or co-operative society under the business of insurance
  2. Under Central, State or Provincial Act, interest paid on any financial corporation.
  3. Under Unit Trust of India Act, 1963, Interest paid on the Unit Trust of India.
  4. Interest paid under any provision of Income-tax Act, 1961 or Wealth-tax Act, 1957 by the Government.
  5. Interest paid to any bank under the regulation of Bank Regulation Act, 1949 or any co-operative society (including a co-operative land mortgage bank).
  6. Under any provision of Income-tax Act, 1961 or Wealth-tax Act, 1957, interest credited or paid by the Central Government.

What is the Rate at which Tax is Deducted at Source?

As per section 194A

  • tax is to be deducted @ 10%
  • if the payee does not have Permanent Account Number (PAN), then tax is to be deducted @ 20%.

Examples of TDS on Interest Covered

  • Interest paid on loan taken from the bank.
  • Interest on loan taken from friends & relatives.
  • Interest on any unsecured loan.

What is the Time Limit on Depositing TDS?

When a non-government deductor deducts tax from interest, the payment is to be made to the credit of Central Government by the due dates given below

  • Tax deducted during the month of April to February must be paid on or before 7 days from the end of the month in which the tax is deducted to the credit of the government.
  • Tax deducted during the month of March must be paid on or before the 30th day of April.

If you want to know about how your TDS on interest (other than Interest on Securities) will be deducted or know more about TDS you can connect with our tax expert at H&R Block.

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CA Ankita Mathur
Ankita, a Big 4 alumna, is a tax expert at H&R Block (India) with vast experience in managing GST-related business services. An avid traveller, Ankita is a regular contributor to the CAclubindia and loves helping people understand about GST and helping companies be GST compliant.

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