Section 194A

What is Section 194A?

Section 194A of the Income Tax Act mandates the deduction of tax at source (TDS) on interest income earned from sources other than securities. This means that any entity paying interest (such as banks, post-office, financial institutions, or companies) to resident individuals and Hindu Undivided Families HUFs must deduct TDS before making the payment to the investor.

This section applies to individuals and Hindu Undivided Families (HUFs) only if they are subject to tax audit under Section 44AB. Besides, 194A is not applicable to NRIs. They come under the purview of Section 195.

When is Section 194A Applicable?

TDS under Section 194A is applicable when:

1. The total interest paid exceeds Rs. 40,000 per financial year (for banks and post offices) or Rs. 5,000 per year (for others).
2. The recipient of the interest is an individual, HUF, firm, or company (except those exempt under specific provisions).
3.  Interest is paid by banks, cooperative societies, NBFCs, and other financial institutions.

Not Applicable to:

• Interest earned on government securities or bonds.
• Interest paid to banking companies, insurance firms, or financial corporations.
• Interest paid to a partner by a partnership firm.
   

Who are Exempted from TDS Under Section 194A?

The following cases are exempt from TDS under Section 194A:

•  If the total interest earned is below Rs. 40,000 (Rs. 50,000 for senior citizens) from banks and post offices.
•  Interest on Income Tax refunds
•  Interest earned from savings bank accounts (not subject to TDS but taxable under income tax returns).
•  If an individual submits Form 15G/15H declaring that their total income is below the taxable limit.
•  Interest on Zero-Coupon Bonds
   

TDS Rates Under Section 194A

The rate of TDS deduction under Section 194A depends on the recipient's PAN availability:

For senior citizens (aged 60 years and above), the exemption limit for interest income is Rs. 50,000 per year under Section 80TTB.

Examples of Section 194A in Practice

Example 1: TDS Deduction on Fixed Deposit Interest

Scenario: Ravi has a fixed deposit of Rs. 10 lakhs in a bank, earning an annual interest of Rs. 60,000.

• The bank will deduct 10% TDS (Rs. 6,000) before paying Ravi the interest.
• Ravi must include this Rs. 60,000 as "Income from Other Sources" in his income tax return (ITR).

Example 2: No TDS Deduction Using Form 15G

Scenario: Priya, a housewife, earns Rs. 25,000 per year as FD interest.

• Since her total income is below the taxable limit, she can submit Form 15G to the bank to avoid TDS deduction.

Example 3: TDS Deduction Without PAN

Scenario: Mohan earns Rs. 70,000 as annual interest from an NBFC but has not provided his PAN.

• The NBFC will deduct 20% TDS (Rs. 14,000) instead of 10% due to PAN non-availability.

Conclusion

Section 194A plays an important role in ensuring tax compliance on income earned by interest (beyond securities). For investors and taxpayers, understanding TDS under section 194a is necessary; whether it is its applicability, exemptions, and/or how to avoid excess TDS deductions. Lastly, investors can easily optimize their tax liabilities and maximize returns by proactively managing TDS through Form 15G/15H, linking PAN, and exploring tax-efficient investment options,

By staying informed, stock market participants can not only comply with tax regulations but also make more efficient financial decisions. Keep an eye on your interest earnings, TDS deductions, and tax planning to ensure smooth financial management!