Section 194A of the Income Tax Act

 Section 194A of the Income Tax Act deals with TDS (Tax Deducted at Source) on interest other than interest on securities. Here's an explanation of its key aspects:


 

Applicability:

  • Section 194A applies to any person responsible for paying interest other than interest on securities.
  • This includes individuals, Hindu Undivided Families, companies, or any other entity responsible for paying interest on various financial transactions.

 

Types of Payments Covered:

  • TDS under Section 194A is applicable to interest payments made on various financial transactions such as fixed deposits, recurring deposits, savings accounts, or any other deposit schemes offered by banks or financial institutions.
  • It also includes interest paid by co-operative societies, post offices, or any other entities offering financial products generating interest income.

 

TDS Rate:

  • The TDS rate under Section 194A varies based on the nature of the payee and the type of financial transaction.
  • For individuals and Hindu Undivided Families, if the total interest payment during the financial year exceeds ₹40,000 (₹50,000 w.e.f. 1st April 2019), TDS is applicable at the rate of 10%.
  • For other entities such as companies, the TDS rate is generally 10% without any threshold limit.

 

Threshold Limit:

  • For individuals and Hindu Undivided Families, TDS is applicable if the total interest payment during the financial year exceeds ₹40,000 (₹50,000 w.e.f. 1st April 2019).
  • For other entities like companies, there is no specific threshold limit mentioned under Section 194A.

Time of Deduction:

  • TDS should be deducted at the time of credit of interest to the account of the payee or at the time of payment, whichever is earlier.
  • If the interest is credited or paid in advance, TDS should be deducted at the time of credit or payment, whichever is earlier.

 

Filing of TDS Returns:

  • The deductor is required to file TDS returns quarterly using Form 26Q.

 

Exemptions:

  • Certain categories of interest payments may be exempted from TDS under Section 194A subject to fulfillment of specified conditions.

 

Example: Suppose a bank pays annual interest of ₹45,000 on a fixed deposit to an individual customer.

  • Since the payment is interest on a fixed deposit, TDS will be applicable under Section 194A as the interest exceeds the threshold limit of ₹40,000.
  • The bank will deduct TDS at the rate of 10% on the interest amount of ₹45,000, which amounts to ₹4,500.
  • The bank will then pay ₹40,500 (₹45,000 - ₹4,500) as net interest income to the customer.

Understanding the provisions of Section 194A is essential for both payers and payees of interest to ensure compliance with tax laws and regulations.

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