TDS on Interest Income: Insights Into Section 194A

In the Finance Act, 2020, which was passed by the Government of India, the provisions of section 194A of the Income Tax Act, 1961 were amended. This new provision requires a TDS to be charged on dividend income declared and paid by a native company exempt from paying income tax under section 10(34).

What is Section 194A?

Section 194A is known for dealing with the provisions that relate to the TDS on interest rates other than the ones levied on securities.. Under Section 194A TDS is to be deducted on interest payable for things such as FDs, and the interest on unsecured loans. According to the provisions of section 194A, tax is to be deducted if interest is paid to a resident. It is important to make note of the fact that 194A TDS is inapplicable if the interest is to be paid to a non-resident. While the payments made to NRIs are covered under the TDS mechanism, the tax in such cases is to be deducted according to the provisions of section 195.

Now that you know what Section 194A is, you need to know what TDS is and the different types of TDS that are levied on people.

What are the different types of TDS?
 

TDS, in simple words, is the acronym for Tax Deducted at Source. TDS is generally charged on numerous types of income in the form of taxes at the time of payout. There are two-fold benefits to TDS. Listed below are some of the different types of TDS that are charged on people across India:

· TDS on an interest charged on loans
 

The TDS changed on loans offered by banks is one of the variants of TDS that a lot of people are known for paying. TDS is charged on loans according to the provisions that fall under Section 194A of the Income Tax Act, 1961. Tax Deducted at Source is charged not only on secured loans but there is also a TDS on interest on unsecured loans.

· TDS for cash withdrawal
 

While there is TDS on loan interest, generally, it is not charged on cash withdrawals. If the withdrawal were to exceed a certain limit and you filed ITR for any or all three previous AYs, you will be charged TDS.

· TDS on FD interest
 

The bank first calculates your annual interest income and then levies the TDS accordingly. But the TDS will be dependent on the interest income. For example, in the case of the Fixed deposit (FD) offered by Metra Trust, if your annual interest income were to exceed ₹40,000 (₹50,000 in the case of senior citizens), you will be charged TDS.

While TDS is charged in the cases mentioned above, there are some in which it is not charged under the provisions of Section 194A. The said cases are:

- If the interest is paid by the Government of India with the help of any provisions ascribed under the Income Tax Act or Wealth Tax Act.

- If the Interest paid is related to zero coupon bonds.

- If the discounted charges on the export bill are not treated as interest, and therefore not liable for tax deduction according to the provisions of Section 194A.

According to Section 197, it is also possible for you to send an application to the assessing officer either for no TDS or a TDS at a lower rate.

· Key Provisions

Threshold Limits: TDS is deducted if the total interest income exceeds ₹ 40,000 in a financial year (₹50,000 for senior citizens).

Rate of TDS: The standard rate of TDS under Section 194A is 10%. If the recipient does not provide their Permanent Account Number (PAN), the rate increases to 20%.

Exceptions: No TDS is deducted on interest earned from savings accounts, or if the interest income is below the specified threshold.

Disclaimer

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