Section 194A

Income Tax of India, 1961 is the governing legal act working for the administration, collection, levy, and recovery of Direct Taxes in India.  Section 194A is the ultimate document when it comes to understanding the process of Income Tax in India. It lays down all the rules and regulations related to Direct Taxes in India. 

Tax Deducted at Source (TDS)

This concept is being introduced to make tax collection at the time of income generation. TDS is payable on the income earned during the previous year which begins from April and ending on March 31, immediately preceding the assessment year.

Assesses mostly calculate their income at the time of filing Income Tax Return. As there was a time lag between receipt of income and payment of tax. To mitigate the time lag, the Income Tax Act comes with the concept of Tax Deduction at Source.

Income Tax Act has laid the responsibility of deducting tax according to various rates under Section 192, 193 and 194 of the Income Tax Act by the person making the payment of Income. As the names suggest, tax is deducted at source and is deposited with the Income Tax Department.

Tax deduction takes place concerning payment made under various heads. It makes it mandate for the assessee to file Income Tax Return to claim refund of the tax deducted at source. This results in improved compliance with the Income Tax Act.

Income Tax Clauses for making Tax deduction at Source

The above table shows some of the clauses under which TDS deduction takes place. Following are the clauses for deduction of tax at source:

Nature of payment which is subject to TDS

Clause under which TDS is deducted

• The rate under which TDS is deducted. As above mentioned, TDS is deducted at the rate of 10% or payment of professional fees but the same is deducted at the rate of 1% on payment to contractors.
• TDS must be deducted only if the payment is above the threshold as mentioned in the Income Tax Act. That is, while TDS on salary is deducted only if it exceeds the ‘minimum taxable income’ which is Rs. 2.50 lakhs for AY2017-18.
• TDS in respect of interest paid by banks must be deducted if the amount received as payment from the bank is above Rs.10,000.

When is Section 194A applicable?

Section 194A provides a deduction of tax source for ‘Interest’ other than on securities paid by banks or other entities. It implies the following:

Nature of payment: The payment is in the form of interest payment other than on securities. So, any payment of interest on fixed deposits or recurring deposits or interest on any loan taken by a company or a firm is subject to TDS.

Who should deduct TDS under section 194A? 

The clause related to payment of interest made by banks and others being a firm or a corporate. We would refer to people liable to deduct tax as ‘deductor’.

However, Section 194A excludes individuals and HUFs.  If an individual makes an interest payment to a bank against a loan taken, so in that case, there will be no TDS deduction before interest is being paid to the bank.

If an individual is liable for an audit under Section 44B of the Income Tax Act, then it is a must for such an individual to comply with the TDS norm and deduct tax according to the prescribed rate.

Applicable to which entity?

As per Section 194A, deductor needs to make TDS deduction irrespective of whether the interest, other than on securities, are paid to individuals, HUF, Companies or Firms which are referred to as deductee. It is also noted that Section 194A deals with interest given to Indian residents. All those interest payments which are made to non-residents are covered under Section 195 of the Income Tax Act.

When to deduct tax at source?

Tax deduction is only possible if the total amount of interest paid by the deductor in the previous year is more than Rs 5000. However, in the case of banks, Post office, Co-operative societies, this amount reaches up to Rs 10,000. In that banks make a deduction if the interest to be paid is more than 10,000/-. Tax is to be deducted at the time of accrual or payment whichever is earlier. It is also being noted that if the amount of interest reaches up to maximum permissible amount then TDS deduction is done on the entire interest amount.

Example

In case the interest paid by a bank on a fixed deposit is Rs 12500, then TDS is deducted on the entire amount that is Rs 12500 because it exceeds the maximum exempted limit of Rs 10,000.

Rate at which Tax is deducted at Source?

The tax needs to be deducted at a flat rate of 10% on the amount of interest. There is no deduction of any ‘Surcharge or Cess’.

It may be noted that in case the deductee does not furnish a Permanent Account Number (PAN), the higher rate of TDS is applicable which would be higher of the rate prescribed by the Income Tax Act or the Finance Tax or @20%. At present, the same is deducted @20%.

Thus, when all the above conditions are complied with Section 194A is applicable.

Process to compute the amount of interest paid

According to the details mentioned above, the amount of interest is payable during the previous year if it exceeds Rs 10,000 in case of bank deposits and Rs 5000 for others.

So, when you open a Fixed deposit account with a bank where interest receivable is above Rs 10,000, so make sure that you do all TDS adjustment before calculating the amount you would receive in hand. On a fixed deposit of Rs 200, 000@7.5%, the amount of interest calculated is Rs 15000 and TDS on the same is 1500(which is 10% of the amount of interest). The amount receivable by the depositor would be the principal Amount of Rs.2,00,000 plus interest of Rs. 13,500.

There are some factors which need to keep in mind while computing TDS which are as follows:

Cumulative Interest

While doing the calculation of the interest payment, the deductor needs to consider the total amount of interest paid or payable to the deductee.

If the interest payable till June for the previous year was Rs 3000 then no TDS is deducted. However, in September if the cumulative interest paid is Rs. 7,000, then the deductee (other than a bank) would have to deduct TDS on Rs. 7,000 @10% in September.

Branch Neutral

 While making a TDS deduction, it is a must for a bank to consider the total interest payments made by the person or entity. In case the fixed deposits are maintained in different branches of the same bank, then the interest calculation is done on a total of all deposits and TDS is deducted on the cumulative interest amount.

TDS to be deducted on the interest accrued:

When a deposit is made for more than one year, then the interest is compounded, the deductor needs to pay TDS as and when the interest is accrued irrespective of whether the same is paid or not.

Cases in which TDS is not deducted under section 194A

Interest is the only source of income for senior citizens in India. The amount above which TDS is deducted by banks on interest payment is very low. The amount of TDS is deducted by banks on interest payment is very low at Rs 10,000 in comparison to the interest income earned by the senior citizens that is much more above Rs 10,000 which is much more above Rs. 10,000 but lower than the maximum amount exempts from payment of income tax. This may also apply to residents other than senior citizens.

Form 15G OR 15H for non-TDS deduction

• In case of the assessee, being a resident of India, if his annual income by way of interest does not exceed the maximum income subject to tax, he may submit a declaration to deductor in a prescribed form.
•  In case interest paid by a person who is not a senior citizen even if the annual income by way of interest is above the maximum income subject to tax, but the tax payable on his total income is NIL.
• Declaration in respect to the same needs to be submitted in Form 15H in case the assessee is a senior citizen and Form 15G in case the assessee is not a senior citizen.
• Declaration needs to be submitted in duplicate, a copy of which is submitted to the Income Tax Department by the deductor.
• The payee can also approach the Assessing Officer for non-deduction of TDS. The Assessing Officer also scrutinizes the application decide by the payee which is not subjected to tax. In case it is subjected to tax then at a lower rate.
• The Assessing Officer may then issue a ‘Certificate for non-deduction of tax or Certificate for deduction of tax at a lower rate’ as he may deem fit.
• Further, any interest paid by the firm to its partners would not be subject to TDS.

What happens to the tax so deducted at source

The tax deducted at source by the deductor needs to be deposited to the Income Tax Deposited to the Central Government. The deductor is required to pay the TDS amount on or before the 7th day of the preceding month. That is the tax deducted in April which needs to be deposited either on 7th May or before.

 This provision is relaxed for March, which is the month of making provisions. It is also a financial year-end for most companies. Thus, the tax deducted at source in March can be deposited by April 30th instead of April 7th.

TDS return and Form 16B

Every deductor must have a TAN.

It is mandated for a deductor to do quarterly submission of the return in a prescribed form along with the mentioning of details of the deductee and the amount paid, and the TDS deducted.

Once the return is filed, FORM 16B is auto generated and the same needs to be downloaded by the deductor and furnished to the deductee every quarter.

Penalty for non-deduction of TDS or failure to deposit the same

TDS non-deduction is prescribed under 194A which is subjected to levy interest at the rate of 1% or some part thereof till such date that the tax is deducted.

Delay in deposit of tax deducted at source is also subject to interest @1.5% for a period from which tax is deducted to the date on which the taxable amount is deposited.