Section 194A: TDS On Interest

TDS must be deducted on interest payable, such as interest on a fixed deposit or interest on an unsecured loan, according to Section 194A of the Income Tax Act. This law does not cover the interest on securities; however, Section 193 does.

TDS To Be Deducted From The Payment

Under this clause, TDS must be deducted from payments made to a resident person for interest.

When a payment is made to a resident, TDS is taken under section 194A; if the payment is made to a non-resident, tax is deducted under section 195.

Examples Of Interest Covered

Section 194A: TDS On Interest

  • Interest on a loan from a relative or a friend
  • Banks pay interest on FDs.
  • On an unsecured loan, interest is paid.

The recipient has the option to give. TDS will not be deducted if the payer of interest fills out Form 15G/Form 15H.

TDS Deduction Requirements Under Section 194A

Section 194A: TDS On Interest

TDS must be deducted by the following individuals:

  • Individuals and HUFs who were subject to audit under section 44AB the previous year. Individuals and HUF who are subject to audit under section 44AB points (a) and (b) are obligated to deduct TDS.
  • Other assessees, such as a partnership firm, a company, an AOP, or a BOI

Deduction Period

TDS is deducted at the moment of payment or credited to the payee’s account, whichever comes first. The rules of this section apply to any amount of interest credited to any account, whether called Interest payable account, suspense account, or any other name, and TDS is to be deducted.

Deduction Rates 

TDS will be deducted at a rate of ten percent. If the income receiver does not provide his PAN to the deductor, TDS will be deducted at a rate of 20%. There will be no surcharge, education cess, or SHEC added to the basic rates. 

The income tax legislation, Section 194A, allows for the deduction of TDS on interest payments.

Payment ByRate of TDSThreshold Limit
Other than banks10% (If PAN is furnished)Rs 5,000
Other than banks20% (If PAN is not furnished)Rs 5,000
Banks10% (If PAN is furnished)Rs 10,000
Banks20% (If PAN is not furnished)Rs 10,000

For example, suppose a bank pays a customer Rs. 15,000 in interest on a fixed deposit. Because the sum exceeds Rs. 10,000, the bank is required to deduct TDS of 10% on the entire amount of interest, i.e. Rs. 15,000. TDS must be deducted even if the amount is not really paid but only credited to the customer’s account.

In The Following Situations, TDS Is Not Required To Be Deducted – 

  • When the payer is a banking company, any bank, banking institution, cooperative society engaged in the business of banking, or a post office, the amount of such interest paid or credited, or is anticipated to be paid or credited in a financial year does not exceed 10,000. 
  • If a financial institution uses core banking systems, this amount is calculated branch by branch. 
  • In every other scenario, 5,000.
  • Interest is paid or credited to any banking company, co-operative society engaged in the banking business, public financial institutions, Life Insurance Corporation of India (LIC), Unit Trust of India (UTI), a company or co-operative society engaged in the insurance business, or any other institution designated by the Central Government.
  • A co-operative society (other than a co-operative bank) may pay interest to a member or on income credited or paid by a co-operative society.
  • Interest on deposits is paid or credited under a method devised by the Central Government and published in the Official Gazette.
  • To income credited or received in relation to deposits (other than time deposits) with a banking firm or cooperative organization engaged in banking operations. In other words, TDS does not apply to savings account interest.
  • Interest is paid by Central Government under any provisions of the income tax act or wealth tax act.
  • Deposits with a primary agricultural credit society, a co-operative land mortgage bank or a co-operative land development bank are credited or paid income.
  • Where the amount of such income, or the aggregate of the amounts of such income credited or paid throughout the financial year, does not exceed Rs. 50,000, interest is paid on compensation awarded by the Motor Accidents Claims Tribunal. If interest has been credited but not paid, the entire amount of interest will be credited without any conditions.
  • Interest is calculated using zero-coupon bonds as an example.
  • Section 10 mentions interest (23FC)
  • Discounting charges on an export bill are not considered interest and are therefore not eligible for a tax credit under section 194A.

By submitting Form No. 15G/15H to the payer, the recipient can opt-out of TDS deduction on interest income.

Under Section 197, an assessee might request no TDS or a lower rate of TDS from the assessing officer.

Is TDS Deductible On Interest On Delayed Payment Of Purchase Bills?

TDS is deducted from interest payments under section 194A. (other than interest on securities). The question now is whether TDS is also deductible when interest is owed to suppliers because of late payments.

Interest is defined in Section 2(28A) as

2(28A) – “interest” means any interest payable in any manner in relation to any money borrowed or debt incurred (including a deposit, claim, or other similar right or obligation), and includes any service fee or other charge in relation to the money borrowed or debt incurred, or in relation to any credit facility that has not been used.

Following the logic of the preceding section, interest paid for late payment of purchase invoices cannot be considered interest under the Income Tax Act.

The Hon’ble Tribunal (Ahmedabad Bench) held in the case of ITO vs. Parag Mahasukhlal Shah that a payment that has a direct nexus with the trading responsibility related to delayed purchase payments will not be considered interest as stated in Section 2. (28A).

In Sri Venkatesh Paper Agencies (Hyd.) Pvt. Ltd. vs. DCIT [ITA No. 636 of 2011], the Hon’ble Tribunal (Hyderabad Bench) took a similar stance.

As a result, such interest does not come under section 194A, and hence no TDS is deductible in this situation.