Section – 194A

Payer : Any person Other than an Individual and HUF, whose total sales, gross receipts or turnover from the business or profession carried on by him do not exceed the monetary limit of ₹ 1 crore and ₹ 50 Lakhs, respectively, under section 44AB during the immediately preceding financial year.

Payee : Any person resident

Rate : 10%

Limit :Interest > ₹5,000 in a year.

However, if the payer is Banking company, Post office or Co. Op society engaged in banking business then limit will be ₹ 10,000 p.a. per payee [the limit is ₹ 50,000, in case of payee, being a resident senior citizen]

However, w.e.f. 01/06/2015, if the Bank has adopted Core Banking Solution the limit will be per bank wise.

 

Provisions simplified

1. No TDS in case of the following Interest Paid or Credited –
2. Interest paid or credited by a partnership firm to any of its partners.
3. Interest paid or credited by a co-operative society (other than co-op bank) to another co-operative society or to any of its members,
4. Income on Zero coupon bond (ZCB),
5. Interest on Kisanvikaspatra, IndraVikas Patra and NSC VIII issue,
6. Interest on Bank’s Saving Account,
7. Interest on Income – Tax refund,
8. Interest credited on the compensation amount awarded by the Motor Accidents Claims Tribunal,
9. Interest on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount if such income paid during the financial year does not exceed ₹ 50,000.
10. Interest payable by an off-shore banking unit on deposits/borrowings from a non-resident or NOT ordinary resident for deposits/borrowings obtained.Off-shore Banking unit would also cover International Financial Services Centre(IFSC) Also , in such cases IDS shall not be deducted. [Circular No. 26 dated]

2. No TDS u/s 194A, if Payee is Bank/co. Op Bank/Financial corporation established under any ACT/UTI/LIC/any Insurer/any Statutory Corporation.
3. If interest is payable to and receivable from the same person, then it shall not be set off against each other for the purpose of TDS u/s. 194A.
4. Where Time Deposits are in Joint names, unless Banker has definite information regarding share of specific depositor, Bank shall aggregate the interest of joint deposit with the interest of the deposit in the individual who has higher interest income. Payer bank can act according to the affidavit or statements of joint-holders.[CBDT Circular No. 256 dt. 09.05.1979]
5. TDS under section 194A on Interest payment under Land Acquisition Act

Interest payment made under the Land Acquisition Act shall be subject to the provisions of sec 194A – Circular No. 526 dated Dec 5, 1988.

However, interest payable on delayed compensation for compulsory acquisition shall not be subject to tax deduction at source – Bikram Singh Vs Land Acquisition Collector [1996] 89 Taxman 119.

6. TDS on Interest Income from Deposits in banks in name of Registrar to the Supreme/High Court during pendency of litigation

Where one (or more) litigant is directed by the court that a specified amount be deposited in the bank directly or through the court, the bank shall deduct tax at source on the interest accruing on such deposit as per provisions of sec 194A. TDS certificate (form 16A) shall be issued by the bank in the name of the depositor(s). Where more than one person has been directed to deposit any specified amount, tax at source shall be deducted on proportionate interest accrued to each of the respective depositor (if it exceeds threshold limit) and TDS certificates shall be issued accordingly –[ Circular No.8/2011 dated Oct 14, 2011].

However, once the court decides the ownership of money lying in fixed deposit , the provision of section 194A shall apply to recipient of the income-[Circular No.23/2015 dated Oct 28, 2015.]

7. Interest payable on hundi by buyer to supplier in case of outstation sale of goods

In case of outstation sale of goods, the supplier draws a hundi (indigenous bill of exchange) on buyer and routes it to through the banker along the relevant documents with instructions to deliver the documents on retirement of hundi and to charge interest on the amount of hundi from the date of acceptance to the date of actual payment. As the interest paid from the buyer is not from the bank as such but only routed through bank to the supplier (who is the recipient), the buyer has to deduct tax at source as per provisions of sec 194A – [Circular No.48 dated Nov 7, 1970].

8. TDS under Section 194A on Payments made by Finance Service Company

Payment made by a company, engaged in retail finance services, corporate advisory services, securities trading and asset securitization, to the persons who has invested in a scheme floated by the company under which the investor is guaranteed a minimum return of 1.5% pm, the company is liable to deduct tax at source u/s 194A from payment of interest made to investors as above – Viswapriya Financial Services & Securities Ltd Vs CIT [2002] 258 ITR 496 (Mad).

Similarly, where the assessee has borrowed money from financiers for making payment to its suppliers and had paid financial charges to the financiers and debited the same under discounting charges, such discounting charges are in nature of interest and liable for tax deduction at source – Kanha Vanaspati Ltd Vs CIT [2007] 17 SOT 160 (Delhi).

9. TDS on Interest on time deposit by bank on daily/monthly basis in CBS software

Since no constructive credit to the depositor’s/payee’s account takes place while calculating interest on time deposits on daily/monthly basis in CBS software used by banks, tax need not be deducted at source u/s 194A on such provision of interest for macro monitoring. Tax shall be deducted at source on accrual of interest at the end of the FY or at periodic intervals or on maturity or on encashment, as applicable – [Circular No.03/2010 dated Mar 2, 2010.]

10. TDS on Charges to get export sale bills discounted

The supreme court has dismissed special leave petition against Delhi High Court’s decision in CIT Vs Cargil Global Trading P Ltd [2011] 11 Taxmann.com 219 wherein the High Court had held that discounting charges paid to get export sale bills discounted is not interest and does not attract TDS u/s 194A – [CIT Vs Cargil Global Trading P Ltd [2012] 21 Taxmann.com 496 (SC)]. Thus provisions of sec 194A are not applicable for bill discounting charges.