You may be well aware that banks deduct a specific amount as tax from your fixed deposit interests every year. This is called the Tax Deducted at Source (TDS) on the interest you earn from your FDs. Section 194A of the Income Tax Act deals with the interest paid on secured and unsecured credit.
The Income Tax Law introduced TDS at the point of income generation to collect taxes from Indian residents efficiently and quickly. While the payer deducts the tax, it is also remitted to the Government on behalf of the payee.
TDS provisions currently apply to the following payments:
However, the Income Tax provisions vary according to the payment type. According to Section 194A, this tax applies to the interest you pay on both secured and unsecured credit facilities.
Remember that Section 194A does not apply to interest paid on securities. Continue reading to understand how this section works and a few essential facts you must know.
As per Section 194A, TDS is deducted from the interest you earn on investments other than securities. As a taxpayer, you must understand this aspect of Section 194A properly.
According to the Section 194A of the Income Tax Act, payment is made in the form of:
Interests on your recurring deposits
Interest income you earn on fixed deposits
Interest charged on advances and loans
Remember that Section 194A applies only to residents and not non-resident Indians. Hence, to cover any payment paid to an NRI, Section 195 becomes applicable.
Knowing the applicable rate of tax, per Section 194A, is critical. Around 10% TDS is deducted when you furnish your PAN details. However, if you fail to provide your PAN information, a rate of 20% is applicable.
Note that as a COVID-19 relief measure, the Section 194A TDS rate was reduced to 7.5% from 10% for all interests paid between the timeline from 14th May 2020 to 31st March 2021.
Another important fact is that no surcharge or cess will be added to these rates. So, the tax will always be deducted at a basic rate. Also, if you pay interest to owners of partnership firms, note that this cannot be included in Section 194A.
Here’s a quick glimpse of Section 194A TDS rates in a tabular form.
Financial institutions with PAN
Financial institutions without PAN
If the gross receipts or the business’ turnover exceeds ₹1 Crore or ₹50 Lakhs in the preceding year, then the HUF or an individual has to deduct TDS. Hence, it is always better to understand the TDS exemptions that can help you streamline the process of paying TDS, per Section 194A.
Now that you are familiar with the Section 194A limit, knowing the deadline to deposit TDS is critical. As per Sec 194A, you must deposit TDS between April and February on or before 7th of the following month.
Ensure you deposit the amount on 30th April or before that in case the tax deduction occurs in March.
The payer is entitled to deduct TDS as per 194A if the interest you earn during a financial year exceeds the following:
₹40,000 if the payer is a bank, financial institution, post office
₹50,000 if the interest is paid to senior investors
₹5,000 for cases other than the ones mentioned above
You can avoid paying TDS by submitting Form 15G/15H to the concerned payer. Note that 15H applies to senior citizens.
As mentioned, declaring your earnings by submitting Forms 15G/15H according to Section 194A can avoid TDS deductions. However, to avoid TDS deductions, certain criteria have to be met that include the following:
The declarant must be an individual and not a company
The previous year’s tax on the total income has to be zero
The total income falls below the exemption limit
The declaration is given to the bank
In another scenario, you can submit Form 13 to the Assessing Officer (AO) for a TDS certificate. This certificate requires you to pay lower taxes, as per Section 194A. However, ensure you apply for this certificate before the deduction of TDS.
Another crucial factor is that you can apply for a certificate with a PAN card. It is impossible to get a certificate without furnishing your PAN details. This way, obtaining the required information about Section 194A of the Income Tax Act can help streamline the process for you to claim your tax benefits quickly.
Get more details related to various sections of the Income Tax Act on Bajaj Markets. Understand the terms and conditions and plan your taxes correctly.
You must log in to the official Income Tax website and complete the process. Then, choose the type of payment and select the TDS option. The steps going forward will be clearly outlined.
Yes, after you pay TDS per Section 194A, you get a TDS certificate.
No, this section does not apply to NRIs.
Yes, banks must deduct tax when the cumulative interests of all deposits exceed ₹40,000 during a particular financial year. Note that in the case of senior investors, the maximum amount when tax will be deducted is ₹50,000.
The payer, who is not an individual or a part of a HUF entity paying interest to a resident, can deduct tax according to Section 194A of the Income Tax Act.
You must submit Form 13 to the AO for a certificate that authorises the payer to deduct tax at low or nil rates, depending on the applicable conditions.