Through the Finance Act, 2020, the Government of India introduced amendments to Section 194A of the Income Tax Act, 1961. The revised provisions require the deduction of tax deducted at source (TDS) on dividend income declared and paid by a domestic company that was previously exempt under Section 10(34). This article provides a detailed overview of Section 194A and explains its key implications.
What is Section 194A of the Income Tax Act?
Section 194A of the Income Tax Act, 1961 requires the deduction of Tax Deducted at Source (TDS) on interest income, excluding interest on securities. This provision applies when banks, financial institutions, companies, or individuals credit or pay interest on deposits, loans, or advances. Typically, TDS is deducted at 10%. However, if the recipient does not furnish their PAN, the deduction rate increases to 20%.
Threshold Limits
- Banks / Post Offices / Cooperative Societies: TDS is deducted only if the total interest earned exceeds Rs. 50,000 in a financial year.
- Other Payers: TDS becomes applicable if the total interest exceeds Rs. 10,000 in a financial year.
Higher exemption for senior citizens
Senior citizens benefit from a higher exemption threshold. For them, TDS on interest from banks, post offices, or cooperative societies is deducted only when the total interest exceeds Rs. 1 lakh in a financial year.
Applicability of Section 194A
Section 194A applies only to payments made to residents. Therefore, its provisions do not cover interest payments made to non-residents.
However, interest paid to non-residents is still subject to TDS. In such cases, tax must be deducted in accordance with Section 195 of the Income Tax Act.
How much is the TDS deduction under Section 194A?
Under Section 194A of the Income Tax Act, Tax Deducted at Source (TDS) is applicable on interest (excluding interest on securities) if it exceeds Rs. 5,000 annually for non-banking entities or Rs. 40,000 for banks (Rs. 50,000 for senior citizens). The TDS rate is 10%, provided the recipient has furnished their PAN. If PAN is not available, the TDS rate increases to 20%. Ensure proper documentation to avoid higher deductions.
What are the provisions under Section 194A?
Below are the key provisions of Section 194A:
- Entities other than Hindu Undivided Families (HUFs) and individuals are required to deduct TDS on interest payments to residents.
- HUFs or individuals must deduct TDS if their receipts or turnover in the previous year exceed Rs. 1 crore for business or Rs. 50 lakh for a profession.
TDS rate chart
According to current government regulations, interest income recipients with a PAN card are subjected to a 10% TDS rate, whereas those without face a 20% rate. Entities other than banks must have income exceeding Rs. 5,000 for TDS to apply. Bank, cooperative society, or post office interest earners require income exceeding Rs. 40,000 (Rs. 50,000 for senior citizens) for TDS application.
Situation |
TDS Rate |
Minimum Income Limit for TDS |
With PAN card |
10% |
Rs. 5000 |
Without PAN card |
20% |
Rs. 5000 |
Interest from Bank, Cooperative Society, or Post Office |
10% (General), 20% (Senior Citizen) |
Rs. 40,000 (General), Rs. 50,000 (Senior Citizen) |
One must also note that no additional taxes such as education tax or surcharge tax are applicable to TDS deductions.
When should TDS be deducted under Section 194A?
TDS under Section 194A is deducted when interest income is paid by entities to residents. Entities other than Hindu Undivided Families (HUFs) and individuals must deduct TDS on interest payments to residents. However, HUFs or individuals are required to deduct TDS only if their receipts or turnover in the previous year exceed Rs. 1 crore for business or Rs. 50 lakh for a profession. Additionally, TDS is applicable when interest income exceeds Rs. 5,000, except when collected by banks, cooperative societies, or post offices, where it applies if income exceeds Rs. 40,000 (Rs. 50,000 for resident senior citizens).
