we shall discuss the TDS implications relating to payment of interest
other than interest on securities as per Section 194A of the Indian
Income Tax Act. Interest on securities is being covered under section
1. Persons liable to deduct tax at source:
Any person except individual or Hindu Undivided Family (HUF). But,
individual and HUF are liable to deduct if their turnover or gross
receipts from business or profession exceeds the limits specified in
section 44AB. In other words, if the individual or HUF is liable to get
accounts audited under section 44AB, they would be covered.
Note: As per section 206AA, with effect from 1.4.2010, every person who
receives income subject to TDS under chapter XVIIB (covers all TDS
cases) shall furnish to the deductor, his PAN. If PAN is not so
furnished, the rate of TDS will be at the rates specified in the Act or
at the rates currently in force or at 20% whichever is higher. Please
note that this applies to non residents also.
2. Payments Liable for deduction of tax at source: Payment of interest, not being interest on securities, to a resident is liable for TDS.
3. Rate of TDS: The present Rate of TDS is 10% plus applicable surcharge and cess.
(there is no surcharge and cess in the case of resident payees other than companies.)
4. Time of liability for TDS:
TDS shall be made at the time of payment of the interest or credit to
the account of the payee whichever is earlier. However, TDS once made
on payment should not again be made on the same amount at the time of
credit and vice versa.
5. Minimum interest payment not liable to TDS:
If the interest amount is paid by a banking company to which the
Banking Regulation Act, 1949 applies: No deduction is to be made on
interest of Rs.10,000/- or below paid or credited during the financial year. Only time deposits are covered here.
If the interest is paid by a co-operative society engaged in banking
business: No deduction is to be made on interest of Rs.10,000/- or less per financial year. Only time deposits are covered here.
Interest on deposits with Post Office: No deduction if the interest
amount in the financial year is Rs.10,000/- or below.
d. In all other cases, if the interest amount is Rs.5,000/- or less in the financial year, there is no need to deduct income tax at source.
6. No deduction in certain cases: No tax is to be deducted at source in the following cases:
a. If the amount is paid or credited to:
A banking company to which the Banking Regulation Act 1949 applies.
Any financial corporation established by or under any Central, State or
A co-operative society carrying on banking business.
IV. The Life Insurance Corporation of
V. The Unit Trust of
Any company or co-operative society carrying on the business of
Such other institutions that the Central Government may notify on this
b. Interest paid or credited by a partnership firm to its partners.
Interest paid by a co-operative society to its members or to another
Interest on deposits other than time deposits maintained with a banking
company to which the Banking Regulation Act 1949 applies.
Interest on deposits with a primary agricultural credit society or a
primary credit society or a co-operative land mortgage bank or a
co-operative land development bank.
Interest on deposits other than time deposits maintained with a
co-operative society carrying on banking business. (Other than the
societies mentioned above).
Interest paid or credited by the Central Government under any provision
of the Indian Income Tax Act, Wealth Tax Act, etc.
Interest on the compensation amount awarded by the Motor Accidents
Claims Tribunal where the amount of such income or, as the case may be,
the aggregate of the amounts of such income credited or paid during the
financial year does not exceed fifty thousand rupees.
Interest paid or credited by an infrastructure capital company or
infrastructure capital fund or a public sector company in relation to a
zero coupon bond issued on or after the 1st day of June, 2005 by such
company or fund or public sector company.
7. Case Laws:
a. Individual’ includes ‘artificial juridical person’
- Even an artificial juridical person can be treated as an individual
under section 194A, as there is nothing to restrict the applicability
of the word ‘individual’ only to a natural person or a human being - ITO v. Arihant Trust  214 ITR 306 (Mad.).
b. Interest on land compensation is covered - Section 194A applies to interest paid/payable on compensation for acquisition of land belatedly - Tuhi Ram v. Land Acquisition Collector  105 CTR (Punj. & Har.) 378.
c. ‘Interest’ satisfying definition in section 2(28A) is liable for deduction of tax at source
- Where the assessee, engaged in retail financial services, floated an
investment scheme under which the investors were guaranteed repayment
of the invested amount within 36 months and a minimum return of 1.5 per
cent per month, the mere fact that the assessee had not chosen to
characterise the repayments as ‘interest’ will have no effect, nor
will it be out of the ambit of the definition of ‘interest’ in section
2(28A). The assessee was therefore liable to deduct tax at source on the payments made to the investors - Viswapriya Financial Services & Securities Ltd. v. CIT  258 ITR 496 (Mad.).
d. Cheque discounting charges: Cheque discounting charges are different from interest payments and the provisions of section 194A are not attracted: ITO Vs. Babu Sah  86 ITD 283 (Mad.).
e. Adjustment of excess/deficiencies is permissible only within the financial year
- Sub-section (4) of section 194A permits adjustment of
excess/deficiencies only within the same financial year and not at any
time - Rishikesh Balkishandas v. I.D. Manchanda, ITO  167 ITR 49 (Delhi).
f. Trial court cannot direct not to deduct tax at source
- When motor insurance compensation is paid by an insurance company
with interest, section 194A will be clearly attracted, and the
insurance company is bound to deduct tax at source if the amount of
interest exceeds Rs. 50,000 in a year. Where the trial court directed
the insurance company to pay the full interest amount without deducting
tax at source, such a direction will be erroneous. It is not within the
power of the executing court to direct the insurance company not to
deduct tax at source and to pay the entire amount, thereby compelling
the insurance company to commit an illegal act violating the statutory
provisions. The direction and order of the trial court required to be
set aside - New India Assurance Co. Ltd. v. Mani  270 ITR 394/ 142 Taxman 523 (Mad.).
g. Deduction must be on gross interest and not net interest -
The expression ‘interest’ can only be the gross interest, and it cannot
refer to the net interest in the context of crediting the interest by
the person responsible for deducting the tax. The principle of netting
the interest has no application to section 194A. Even when there are
two or more transactions in which interest is paid or interest is
received from, it is only on the gross amount of interest credited that
tax has to be deducted under this provision - CIT v. S.K. Sundararamier & Sons  240 ITR 740 (Mad.).
8. Important Circulars:
a. Deposits in joint names - In
the case of a deposit in joint names in the absence of any proof to the
contrary, both the persons can be treated as payees for the purposes of
deduction of tax under section 194A.
responsible for deducting the tax in the absence of any information to
the contrary, may aggregate the interest on a joint account with the
interest on deposit in the individual’s account who
has higher interest income.
certificate of deduction of tax at source under section 203 will be
given to the person in whose name the interest on joint account has
for the payment of tax deducted at source under section 199 will be
given to the person in whose name the certificate under section 203 has
been issued.If any objection is taken to the deduction of tax at source
in the above manner or it is contended that the joint account holders
constitute a separate person and no deduction of tax at source should
be made, it will be up to them to point it out to the person paying the
interest by leading evidence, i.e., by filing affidavits or statements in the manner laid down in the proviso to sub-section (1) of section 194A.—Circular : No. 256 [F. No. 275/17/79-IT(B)], dated 29-5-1979.
b. Interest payable on behalf of Government - The
provisions of section 194A are equally applicable to persons
responsible for paying such interest on behalf of the Government to any
person resident in India.—Circular :
No. 22/68-IT(B) [F. No. 12/23/68-IT(B)], dated 28-3-1968/13-5-1968 as
modified by Letter F. No. 12/23/68-IT(B), dated 7-11-1968.
c. Interest paid by consignors to commission agents - Tax
will have to be deducted at source in accordance with section 194A from
the interest paid by consignors to their commission agents even where
such interest is paid under an arrangement whereby the commission agent
retains for himself the interest due to him at the time of paying to
the consignor the moneys due to him on account of the consignment.—Letter : F. No. 12/12/68-IT(A-II), dated 23-9-1968.
d. Payments to exempt educational institutions/charitable trusts - So far as an educational institution whose income is exempt from tax under section 10(22)
is concerned, the provision of section 194A will not apply to it and no
deduction of tax at source from interest is required to be made by the
payers. As regards a charitable trust whose income is exempt under
section 11, a statement in writing may be made by the institution
concerned under section 194A, or the institution may apply for a
certificate for deduction at a lower rate or for authorisation of
non-deduction at source under section 197.—Letter : F. No. 12/113/68-IT (A-II), dated 28-10-1968.
e. Interest on cumulative deposits/debentures/bonds - In
respect of cumulative deposits/debentures/bonds tax is required to be
deducted at source every time the interest is credited in the account
books of the payer and is not to be postponed till the maturity of the
deposit/debenture/bond—Circular : No. 643, dated 22-1-1993.
f. Commercial papers/Certificates of Deposits - The
difference between the issue price and the face value of the Commercial
Papers and the Certificates of Deposits is to be treated as ‘discount
allowed’ and not as ‘interest paid’. Hence, the provisions of the
Income-tax Act relating to deduction of tax at source are not
applicable in the case of transactions in these two instruments.—Circular : No. 647, dated 22-3-1993.
g. Reinvestment term deposits - In
the case of reinvestment term deposit, tax has to be deducted at source
at the time of credit of interest to the account of the payee or at the
time of payment thereof, whichever is earlier. If credit is given to
the account of the payee or payment is made to him annually, the tax
may be deducted annually. It is clarified that a credit to interest
payable account or suspense account, etc., is also taken as credit to
the account of the payee, even though this credit is not reflected
separately in the payee’s account—Circular : No. 715, dated 8-8-1995.
h. Retrospective renewal of time deposits - When
a time deposit is renewed retrospectively, the relevant date for
deciding the applicability of section 194A would be that date of
renewal. Thus, if the time deposit is renewed on or after 1-7-1995, the
tax deduction at source will have to be made from interest paid or
credited in respect of such a time deposit—Circular : No. 715, dated 8-8-1995.
When part of purchase instalment is paid by a hirer to the owner under
a hire purchase contract, the provisions of section 194A are not
attracted. – Instruction No.1425 dt. Nov. 16, 1981.
All the information provided above is for informative purposes only.
You are advised to consult your tax consultant before you act upon any
of the above information. In spite of this, if any person acts upon
this information and suffers any loss, we are not to be held liable.
Though all efforts have been made to provide latest information, you
are advised to check latest circulars, latest changes in law etc from
the Indian Income Tax Department.
www.incometaxquery.comis a participant in the Amazon Services LLC
Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees
by advertising and linking to (amazon.com, or endless.com, MYHABIT.com, SmallParts.com, or