TDS on Interest other than Interest on Securities 194A

Any person (not being an individual/HUF*), responsible for paying to a resident any income by way of interest other than interest on securities, is responsible to deduct tax at source and deposit the same to the Government Treasury within the time stipulated. The recipient of the income (though s/he gets only the net amount after TDS) is liable to tax on the gross amount. The amount deducted is adjusted against her/his final tax liability.

*However, the provisions of section 194A shall be applicable to individuals/HUFs, whose total sales, turnover or gross receipts from the business/profession carried on by him/her exceed the monetary limits specified u/s 44AB during the financial year (FY) immediately preceding the FY in which the income is to be credited/paid. Monetary limit (at present) in case of business is turnover of Rs.1 crore and in case of profession, gross receipts of Rs.25 lacs.

When is tax not deductible?

Tax u/s 194A is not deductible where the aggregate amount of interest credited/paid (or likely to be credited/paid) during the FY does not exceed the amount given below:

How is threshold limit (interest income) computed?

Until 31st May, 2015, the threshold limit was computed with reference to the income credited/paid by a branch of the banking company or co-operative society, as applicable.

W.e.f. 1st June 2015, the computation of interest income for the purposes of deduction of tax under section 194A should be made with reference to the income credited/paid by the banking company or the co-operative society or the public company (i.e. all branches) which has adopted core banking solutions.

When are the provisions not applicable?

By virtue of sections 194A(3) and 197(1C), tax u/s 194A is not deductible in the following cases:

1. The aggregate amount of interest credited/paid (or likely to be credited/paid) during the FY does not exceed the specified threshold limit.
2. Interest is paid/credited to any banking company, co-operative bank, public financial institutions, LIC, UTI, an insurance company, co-operative society carrying the business of insurance or notified institutions.
3. Interest is paid/credited by the firm to its partner(s).
4. Interest is paid/credited by co-operative society to its members [i.e. interest on other deposits (other than time deposits) to members holding one share] or to any other co-operative society. Until 31st May, 2015, this exemption was extended to time deposits also but w.e.f. 1st June 2015 (as amended by Finance Act, 2015), the exemption provided from deduction of tax from payment of interest to members by a co-operative society shall not apply to the payment of interest on time deposits by the co-operative banks to its members. Definition of Time Deposit as amended by Finance Act 2015 w.e.f 1st June 2015: Time deposits shall include recurring deposits within its scope for the purposes of deduction of tax under section 194A. However, the existing threshold limit of Rs.10,000 for non-deduction of tax shall also be applicable in case of interest payment on recurring deposits to safeguard interests of small depositors.
5. Interest is paid/credited in respect of deposits under the schemes of Post Office (Time Deposits), Post Office (Recurring Deposits), Post Office Monthly Income A/c, Kisan Vikas Patra, NSC VIII Issue, Indira Vikas Patra.
6. Interest is paid/credited on deposits (other than time deposit made on/after July 1, 1995) with a banking company or interest paid/credited to non-members on deposit with a co-operative bank.
7. Interest paid/credited in respect of deposits (by non-members) with a primary agricultural credit society or primary credit society or co-operative land mortgage bank or co-operative land development bank.
8. Interest paid/credited by Central Govt under different provisions of Direct Taxes.
9. Interest paid/credited on compensation awarded by the Motor Accidents Claim Tribunal if the aggregate amount does not exceed Rs.50,000. Threshold limit of Rs.50,000 is applicable separately where interest is to be shared by 2 or more claimants – National Insurance Co. Ltd Vs Draupadibai [2011] 11 Taxmann.com 65 (MP). W.e.f. 1st June 2015, deduction of tax u/s 194A from interest payment on the compensation amount awarded by the Motor Accident Claim Tribunal shall be made only at the time of payment, if the amount of such payment or aggregate amount of such payments during the FY exceeds Rs.50,000.
10. Income paid/payable by an infrastructure capital company/fund or public sector company in relation to zero coupon bonds.
11. Interest paid/payable by an Offshore Banking Unit on deposits made (or borrowings) on/after Apr 1, 2005, by a person who is resident but not ordinarily resident in India
12. Interest referred to in section 10(23FC).

When is tax deducted at nil rate or lower rate?

When a declaration is submitted in form 15G/15H u/s 197A:

If a declaration is submitted u/s 197A by the recipient to the payer along with his/her PAN, then no tax is deductible if the following conditions are satisfied:

1. Recipient is a person other than a company/firm
2. Tax on total income of the previous year (PY) is nil
3. Total income does not exceed the exemption limit (i.e. for AY 2016-17, Rs.2,50,000 or Rs.3,00,000 or Rs.5,00,000, as applicable). This condition is not applicable if the recipient is a resident senior citizen.

Such a declaration shall be given in duplicate in form 15G (15H for senior citizens). In case of Senior Citizens Saving Scheme, 2004 (SCSS), investors can submit the declaration. Nominees of investors of SCSS can also produce the declaration at the time of payment after the death of the depositor. On submission of declaration to the bank, bank shall not deduct tax (subject to the conditions) on payment of interest.

When an application is submitted in form 13 u/s 197:

As per provisions of section 197, the recipient can apply in form no.13 to the Assessing Officer to get a certificate authorizing the payer to deduct tax at lower rate (or deduct no tax, if certain conditions are satisfied). There is no time limit for application and it can be filed at any time before actual deduction of tax. If the recipient does not have PAN, he cannot apply for the certificate.

The certificate shall be issued, directly to the person responsible for paying income, on a plain paper, under an advice to the applicant. The certificate cannot be issued with retrospective effect. The recipient may furnish copy of such certificate to the person responsible for paying the income for lower/no deduction of tax at source.

Deposit in joint names

In case of deposit in joint names, where there is no definite information about the share of deposit holders, the payer of interest may aggregate the interest in the joint account of the holder who has higher interest income – Circular No.256 dated May 29, 1979.

For example, There is a deposit of Rs.7,000 in a joint account of XY (definite share unknown) and also there are deposits of Rs.45,000 in the name of X and Rs.3,000 in the name of Y with same person and ROI being 10%. The payer of interest may aggregate the interest of Rs.700 (7000 @10%) with the interest of Rs.4500 (45000 @10%) on deposit of X (as X has higher interest income). If the interest income exceeds the threshold limit, the payer shall deduct tax at source @10%.

On the other hand, if the payer has definite information about the share of joint deposit, then the proportionate interest income from joint deposit will be added to the separate interest income of each of the deposit holders – Circular No.256 dated May 29, 1979.

In the same example, if both the holders have equal share, then Rs.350 (7000 x 10% @50%) will be added to the interest income of each of the holders. If the interest income exceeds the threshold limit (separate for each of the holders), the payer shall deduct tax at source @10%.

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.

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.

For instance, in the course of appellate proceedings, the court directs an insurance company to make a term deposit of a part of compensation awarded by Motor Accidents Claims Tribunal. The credit of TDS on interest accruing on such deposit will be allowed to the insurance company which has made such deposit.

These provisions shall not be applicable in the following cases:

1. Any deposit in the bank held by or dealt by the court (or any other person appointed by the court) in the capacity of administrator/receiver/any authority of similar nature
2. Any deposit which has not been made by any specific depositor but has arisen due to attachment made by the court
3. Cases of representative assessee within the meaning of section 160.

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.

Interest payable by consignors to their commission agents

Tax is to be deducted at source even where such interest is paid under an arrangement whereby the commission agent retains for himself/herself the interest due to him/her at the time of paying to the consignor the moneys due to him/her on account of the consignment – Circular letter F No.12/12/68-IT(A-II) dated Sep 23, 1968.

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).

Payment under a hire purchase agreement

Provisions of sec 194A are not applicable in case where a part of purchase instalment is paid by a hirer to the owner under a hire purchase contract – Instruction No.1425 dated Nov 16, 1981.

Cheque discounting charges

Provisions of sec 194A are not applicable in case of cheque discounting charges as such charges are different from interest payments – ITO Vs A S Babu Sah [2003] 86 ITD 283 (Mad).

Interest on delayed payment of insurance compensation

Tax is to be deducted at source u/s 194A by an insurance company in case of interest on delayed payment of compensation awarded by Motor Accidents Claims Tribunal and trial court cannot direct insurance company to make payment without deduction of tax at source – New India Assurance Co Ltd Vs Mani [2004] 270 ITR 394 (Mad).

Personal loan of directors routed through company

It has been held by Supreme Court in CIT Vs Century Building Industries P Ltd [2007] 163 Taxman 188, that where director’s personal loans were routed through the company’s books by back-to-back transactions/cheques, the company has an obligation to deduct tax at source u/s 194A on interest payment. It does not matter whether the company has only acted as a medium for collection and disbursement. The tax should be deducted at the time of credit notwithstanding the arrangement between the company, directors and the agency giving loan.

Discount distributed to subscribers of a chit fund

Discount distributed to subscribers of a chit fund in the form of bid amount offered by the successful bidder who takes chit is not interest and consequently, tax is not deductible at source u/s 194A – CIT Vs Sahib Chits (Delhi) P Ltd [2009] 185 Taxman 34 (Delhi), ITO Vs Daspalla Chits & Investments Ltd [2010] 4 ITR (Trib) 732 (Visakha).

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.

Payment of interest component of decree by judgment debtor

Judgment debtor is not liable to deduct tax at source on interest component of decree – Madhusudhan Shrikrishna Vs Emkay Exports [2010] 188 Taxman 195 (Bom).

Interest for utilization of credit limit of other party

Where an assessee utilizes unspent credit limit of another party and reimburses interest payable by the said party to the bank, the assessee is liable to deduct tax at source from such payment u/s 194A – Bhura Exports Ltd Vs ITO [2011] 13 Taxmann.com 162 (Cal).

Interest on overdue purchase bills

Payments which have direct link and immediate nexus with the trading liability connected with the delayed purchase payments, will not fall within the meaning of interest and therefore, interest on delayed payment of purchase bills is not subject to tax deduction at source u/s 194A – Sri Venkatesh Paper Agencies (Hyd) P Ltd Vs CIT [2012] 24 Taxmann.com 52 (Hyd).

Loan processing fees

Loan processing fees falls within the definition of interest and the same would be liable to deduction of tax at source u/s 194A – Aban Investments P Ltd Vs CIT [2012] 52 SOT 36 (Chennai).

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.