Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
- Guaranteed@ Income Benefit for upto 25 years
- Flexibility to choose income period
- Premium break for females on child birth or any listed specific illnesses
- Life cover for the premium payment period
- Enhance your life cover with rider offerings
ARN. No. KLI/23-24/E-BB/1201
Features
- Increasing Life Cover*
- Guaranteed^ Maturity Benefits
- Enhanced Protection Through Riders
- Tax Benefits
- Dual Benefits: Guaranteed^Maturity + Death benefits
Ref. No. KLI/22-23/E-BB/999
Section 194A of Income Tax Act: TDS on Interest Income
Section 194A of Income Tax Act mandates Tax Deducted at Source (TDS) on interest income, ensuring timely tax collection. It provides taxpayers with clarity on the deduction process, thresholds, and exemptions to enable informed financial decisions and foster compliance with tax regulations.
- 2,193 Views | Updated on: Mar 05, 2025
What is Section 194A of Income Tax Act?
Section 194A, often referred to as the 194A TDS section, plays a fundamental role in ensuring compliance with tax laws. This section pertains to the deduction of TDS on interest income over interest on securities. It applies to entities making payments where the interest exceeds prescribed thresholds. Key aspects include:
- Applicability to interest from banks, financial institutions, and other entities.
- Exclusions for interest on securities as a separate section governs it.
Limits and Conditions for Applicability of Section 194A
Section 194A lays out clear threshold limits and specific conditions to determine its applicability, ensuring clarity and uniformity in TDS compliance.
- Threshold Limits
For banks and financial institutions, TDS is applicable if interest exceeds ₹40,000 in a financial year (₹50,000 for senior citizens). For other entities, the threshold is ₹5,000.
Example: Let’s say a bank credits ₹42,000 as interest to a regular account holder. Since this amount surpasses ₹40,000, TDS at the applicable rate must be deducted. For senior citizens, the threshold is higher at ₹50,000. So, if the interest credited is ₹48,000 for a senior citizen, no TDS would be deducted.
- Eligible Deductors
Banks, cooperative societies, financial institutions, and individuals subject to tax audits under Section 44AB are mandated to deduct TDS.
Example: A company undergoing a tax audit pays ₹10,000 as interest to a vendor. This exceeds the ₹5,000 threshold, so the company must deduct TDS and deposit it to the government.
- Payment Type
TDS applies to various forms of interest, including those on loans, fixed deposits, and recurring accounts.
Example: Suppose you have a recurring deposit with a bank and earn ₹45,000 in interest during the financial year. As this exceeds the ₹40,000 limit for banks, TDS will apply. Similarly, if an individual earns interest from a loan repayment of ₹7,000, TDS will be deducted as it exceeds the general ₹5,000 threshold for non-bank entities.
- Cumulative Payments
Even if individual payments don’t cross the threshold, cumulative payments within a financial year that exceed the limit trigger TDS.
Example: Imagine a financial institution credits ₹25,000 as interest in June and another ₹20,000 in December to the same account. Although each payment is below the threshold, the cumulative total of ₹45,000 exceeds ₹40,000, necessitating a TDS deduction.
TDS Deduction Process Under Section 194A
Understanding the details of interest on TDS is essential for maintaining compliance and avoiding financial penalties. The process involves a number of key steps that ensure accuracy and timely adherence to tax regulations.
- Calculation of Interest
- Deduction Timing
- Deposit of TDS
- Filing of Returns
Assess the total interest amount to determine if it surpasses the applicable threshold limits. This step ensures that TDS is deducted only when legally mandated, preventing unnecessary deductions.
TDS must be deducted at the earlier of two events: when the interest is credited to the payee’s account or when it is paid. This ensures alignment with the principles of accrual and cash-based accounting, minimizing discrepancies.
The deducted TDS must be deposited with the government within the stipulated timelines, usually by the 7th day of the subsequent month. For March, the deadline extends to April 30th. Timely deposits avoid penalties and ensure compliance.
Deductors must file TDS returns in Form 26Q every quarter to report all interest-related deductions. Accurate and timely filing helps reconcile tax credits for deductees and enables smooth refund and adjustment processing.
What is the Rate of TDS Under Section 194A?
The 194A TDS rate is 10%, provided the deductee furnishes their PAN. Without a PAN, TDS is deducted at 20%.
Lower deduction rates or exemptions may be availed if the deductee submits Form 15G/15H or a certificate for reduced TDS.
Exemptions Where TDS is Not Applicable Under Section 194A
Numerous exemptions relieve the burden of TDS on specific interest payments, ensuring smoother compliance with tax regulations:
- Interest to Banking Companies
- Interest to LIC or UTI
- Tax-Free Thresholds
- Exemption Certificates
- Specified Entities
Payments made to banks or cooperative societies are exempt as these institutions are governed by separate tax regulations.
Interest paid to Life Insurance Corporation (LIC) or Unit Trust of India (UTI) does not attract TDS, reflecting their exempt status under tax laws.
Payments below the specified limits (₹40,000/₹50,000 for banks and ₹5,000 for others) are exempt, simplifying compliance for smaller transactions.
Deductees with valid Form 15G/15H or lower deduction certificates issued by the tax department are exempt. These forms cater to individuals whose total income is below the taxable limit.
Payments to government entities, mutual funds, or other exempt organizations do not attract TDS due to their special status in taxation.
Importance of Section 194A for Taxpayers
Understanding Section 194A equips taxpayers with crucial insights into effective tax compliance, particularly in managing the interest on TDS:
- Avoid Non-Compliance: It ensures that taxpayers and deductors meet their legal obligation to deduct and deposit TDS on time, avoiding penalties and interest charges for delays.
- Streamline Tax Liability: By ensuring tax is collected at the source, it prevents the last-minute burden of paying large tax dues, enabling smoother compliance.
- Enhance Financial Planning: Knowing the thresholds and rates for TDS helps taxpayers plan their investments and expenses better, ensuring efficient cash flow management.
If you are handling TDS on interest on loan or from a fixed deposit, staying updated on Section 194A can help avoid errors and ensure optimized tax planning.
Conclusion
Section 194A ensures systematic tax collection on interest income. As a taxpayer, you should monitor thresholds, file returns promptly, and leverage exemptions to stay compliant and optimize your tax liability. Avoid errors like ignoring the tax deductions list or missing TDS deposits to prevent penalties. Keeping track of TDS on investments like a fixed deposit under 80C can help streamline your financial planning.
FAQs on Section 194A
1
What is Section 194A of the Income Tax Act?
Section 194A mandates TDS on interest income (excluding interest on securities) when payments exceed specified thresholds. It applies to banks, financial institutions, and other eligible deductors.
2
Who is required to deduct TDS under Section 194A?
Banks, cooperative societies, financial institutions, and individuals or entities subject to tax audit under Section 44AB must deduct TDS under Section 194A.
3
What type of interest is covered under Section 194A?
It covers interest on deposits, loans, and fixed deposit under 80C, excluding interest on securities and exempt categories.
4
Are individuals required to deduct TDS under Section 194A?
Individuals are required to deduct TDS only if they are subject to tax audit under Section 44AB.
5
What is the threshold limit for TDS deduction under Section 194A?
The limit is ₹40,000 for banks and financial institutions (₹50,000 for senior citizens) and ₹5,000 for other entities.
6
Is TDS applicable on recurring deposits?
Yes, if the interest on a recurring deposit exceeds the specified threshold, TDS under Section 194A is applicable.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
- Guaranteed@ Income Benefit for upto 25 years
- Flexibility to choose income period
- Premium break for females on child birth or any listed specific illnesses
- Life cover for the premium payment period
- Enhance your life cover with rider offerings
ARN. No. KLI/23-24/E-BB/1201
Features
- Increasing Life Cover*
- Guaranteed^ Maturity Benefits
- Enhanced Protection Through Riders
- Tax Benefits
- Dual Benefits: Guaranteed^Maturity + Death benefits
Ref. No. KLI/22-23/E-BB/999
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The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
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