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Section 194A of Income Tax Act

Section194A says about the TDS on interest other than securities on interest. This comprehensive guide is all about various details regarding section 194A of the income tax act. This section actually deals with the provisions that are related to deducting the TDS on interest such as interest that is paid for an unsecured loan, interest paid on various loans and advances, interest paid by the bank on fixed deposit, and many other similar kinds of interest.

What is Section 194A of income tax act? 

Section 194A of the Income Tax Act conditions that the TDS or the Tax Deducted at Source should be deducted on the interest. The main objective of section 194A is to collect tax from every source of income. Any person who is liable to make payment of certain nature to another person shall reduce the TDS and remit the amount to the central government. 

There is a deadline for depositing the TDS. When the tax is deducted for the months of April to February, the TDS shall be remitted to the account of the central government on or before the 7th of the coming month. In another case, when the TDS is deducted for the month of March, the amount must be remitted on or before April 30th. To have a clear understanding, here is an example.

ABC Company’s tax which is deducted on April 20th must be deposited on or before May 7th. Likewise, the tax deducted on March 15th must be deposited on or before April 30th.

When does TDS under Section 194A of income tax act need to be deducted?

The 194A TDS should be deducted from any person who makes certain payments as mentioned under the Income Tax Act. However, the TDS is not deducted of a person is making the payment individually or by HUF since their books are not audited for any purpose. But in certain cases like rent payments that are made by HUF or individuals whose amount exceeds more than Rs 50,000 per month should deduct TDS at the rate of 5%. This is in case if the individual or HUF is not liable to undergo the tax audit. Such individuals and HUF’s do not have to apply for TAN as well.

If you are an employee of a company that company will deduct TDS at the income tax slab rates that are applicable. But again, this will be based on the payment slab. If you do not come under the taxable list, then the TDS will not be deducted. When an employee earns more than Rs. 2, 50,000 annually, he/she will come under the taxable income, and TDS will be deducted. In the case of the Bank, 10% of TDS will be deducted if they have provided the PAN details. When TDS is to be deducted during the time of credit of income to the payee’s account or at the time of payment that is made as cash, cheque, draft, or any other similar types.

Features of 194A of the Income Tax Act

There are some significant features of Section 194A and they are stated below.

  • Any person who pays interest other than interest on securities to a resident must deduct TDS. That person will not be an individual or HUF.
  • When an individual or HUF who is liable to audit their accounts according to the section 44AB [clause (a) or (b)] are required to deduct TDS on payment of interest other than interest on securities to a resident.
  • You should also know that section 194A is only applicable in case of payment of interest to residents. This means that the provisions of section 194A will not be applied to the payment of interest to non-residents.

Threshold Exemption limit under Section 194A of Income Tax Act

The threshold exemption limit is the limit that shows from whom no TDS is deducted. This is based on the amount of turnover on an annual basis. Let us see who will come under the threshold exemption limit under section 194A of the income tax act.

  • In the case of a Bank – A person whose aggregate amount of interest does not exceed Rs 40,000 is exempted from paying TDS. However, the threshold exemption limit for senior citizens is increased to Rs. 50,000.
  • In the case of Co-operative Society – A person’s aggregate amount of interest is not more than Rs. 40,000 will come under the exemption list for TDS deduction. Same as a bank, for the senior citizens whose aggregate amount of interest is not more than Rs. 50,000 does not have to pay TDS.
  • In the case of the Post Office – People whose aggregate amount of interest does not increase more than Rs,40,000 is exempted from TDS deduction, and for senior citizens, the threshold limit is Rs.50,000.
  • In other cases other than a bank, co-operative society, or post office, people whose aggregate amount of interest does not increase more than Rs 5000 is exempted from TDS deduction

There are certain interests too which are exempted under the Section 194A and such interest include:

  • Interest that is paid by a partnership firm to its partners.
  • Interest paid to the members of co-operative society by the co-operative society
  • Interest paid to any financial corporation, bank, life insurance corporation unit trust of India, company, or cooperative society that is engaged in the insurance business, etc.

What is the TDS Return rate to be filed under Section 194A?

There are various applicable rates of TDS. If the PAN details are provided, then the rate of TDS will be 10% of the turnover in a financial year. But if the PAN is not furnished, then 20% of TDS will be deducted. TDS deducted at the basic rate and surcharge, education cess or SHEC will not be included in the rate. But when the covid pandemic arose and made everyone suffer from the financial crisis, the income tax department announced the covid-19 relief measure in which the 194A TDS rate under section 194A is reduced to 7.5% for the interest paid between the dates May 14th, 2020 to March 31st, 2021.

1.Is TDS deducted on interest against a loan paid to a bank?
Ans: No. If the interest is paid to a bank by an individual or a company against the loan, the TDS provisions will not be applicable.

2.What will happen if the TDS is not paid?
Ans: If you are an employee and if your employer has not paid the TDS, then you will receive a notice from the income tax department that says there is a mismatch in the TDS claimed and taxes paid. Only when the TDS is paid, it will reflect against your PAN.

3.How do I know how much TDS amount is deducted from an account?
Ans: You can check online by visiting the official website of the Income Tax Department of India. You should register as a new user and enter the details of PAN and generate a password. After logging in to your account, you must select the View Tax Credit Statement option or the Form 26AS. You will now see a page for TDS Reconciliation Analysis and Correction Enabling System. This will have all the details regarding the taxpayer’s tax liabilities, including the information of TDS, advance tax paid, and other required details.