09 June 2012
Circular No. 617 Extension of applicability to interest on time deposits with banks, etc.
Deduction of income-tax at source from interest other than ``interest on securities''--Section 194A of the Income-tax Act, 1961--Extension of applicability to interest on time deposits with banks, etc.--Regarding
Circular No. 617 Dated 22/11/1991 According to the provisions of section 194A of the Income- tax Act, 1961, any person, not being an individual or HUF, who is responsible for paying to a resident (for non- residents, the provisions are different and are contained in section 195) any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. These provisions are, however, subject to the exceptions provided in the said section. 2. One such exception, contained in clause (vii) of sub- section (3) of section 194A, hitherto related to interest- income credited or paid in respect of deposits with, (i) a banking company to which the Banking Regulation Act, 1949, applied, or (ii) a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank). 3. The Finance (No.2) Act, 1991, has, however, substituted the aforesaid clause with the following clauses with effect from 1st October, 1991:-- "(vii) to such income credited or paid in respect of deposits (other than time deposits) with a banking company to which the Banking Regulation Act, 1949, applies (including any bank or banking institution referred to in section 51 of that Act); (viia) to such income credited or paid in respect of-- (a) 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; (b) deposits (other than time deposits) with a co-operative society other than a co-operative society or bank referred to in sub-clause (a),engaged in carrying on the business of banking. Explanation.--For the purposes of clauses (vii) and (viia) "time deposits" means deposits (excluding recurring deposits) repayable on the expiry of fixed periods." 4. The effect of the aforesaid change is that income-tax shall now be deductible at source from the interest income on time deposits with (i) a banking company, or (ii) a co- operative society engaged in carrying on the business of banking, other than a co-operative land mortgage bank, a co-operative land development bank, primary agricultural credit society or a primary credit society. Deduction of tax at source will have to be made from such interest income credited or paid on or after the 1st October, 1991. In this connection, the following points may be noted:-- (a) Deduction of tax is required to be made at the time of credit of interest income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier. (b) Where the interest is credited in the books of account of the payee, to any account, whether called "Interest payable account" or "suspense account" or by any other name, such crediting shall be deemed to be credit of such interest to the account of the payee and tax will have to be deducted at source. Thus, in the case of cumulative time deposits where interest is credited periodically but the payment to the depositor is made only at the time of maturity, tax will have to be deducted at source every time the credit of interest is made in the account books of the payer/bank. (c) In the case of cumulative time deposits made prior to 1-4-1991, no tax is required to be deducted in respect of interest income which relates to the period prior to 1-4-1991. (d) The new provisions are not applicable to interest on savings bank accounts. 5. The rates at which the tax is required to be deducted on income by way of interest other than interest on securities are contained in Part II of the First Schedule to the Finance (No. 2) Act, 1991, and are summarised below:-- (a) in the case of non-corporate taxpayers, resident in India, at the rate of 10% of the interest income and surcharge thereon, which is at present 12% of such income-tax (thus, the rate of tax deduction will be 11.2%). (b) in the case of domestic companies, at the rate of 20% of the interest income and surcharge thereon, which is at present 15% of such income-tax (thus, the rate of tax deduction will be 23%). 6. No deduction of tax under certain circumstances.--There will, however, be no deduction of tax at source provided the amount of interest income does not exceed Rs.2,500 during a financial year. (This is in terms of the provisions of clause (i) of sub-section (3) of section 194A). The limit of Rs.2,500 is to be worked out with reference to the aggregate of the amounts of interest income credited or paid or likely to be credited or paid during a financial year by a payer to a payee. For the current year the banks will have to take into account the amount of interest paid or credited during the entire period of the financial year 1991-92, and not only the interest paid or credited after the 1st October, 1991. 7. There will also be no deduction of tax at source where the recipient of the interest income, being a resident individual, furnishes a declaration in writing, in duplicate, in Form No.15H, to the effect that the tax on his estimated total income of the relevant financial year will be nil (provisions of section 197A of the Income-tax Act refer). This declaration is to be furnished to the person responsible for paying the interest income. 8. Besides the above, the proviso to sub-section (1) of section 194A of the Income-tax Act provides that in the case of a person (not being a company or a registered firm), there will be no deduction of tax at source provided he furnishes (i) and affidavit, or (ii) a statement in writing in Form No.15A to the effect that his estimated total income for the relevant assessment year is below the taxable limit. The statement in Form No. 15A is required to be attested by a Member of Parliament, a Gazetted Officer of the Central or State Government, an officer of any banking company, etc., as indicated in the Form. This provision applies in the case of trusts also which are not companies. 9. Section 197 of the Income-tax Act also provides that in the case of taxpayers other than companies, the Assessing Officer, on an application made to him, can issue a certificate for deduction of tax at a lower rate than the rates in force, or, for no deduction of tax at source if he is satisfied that the total income of the recipient so warrants. Where any such certificate is given, the payer of the interest income, e.g., a bank manager during the validity of the certificate, is to deduct income-tax at the rates specified in such certificates or deduct no tax, as the case may be. 10. The responsibility and the procedure for deduction of tax.--The responsibility for deducting tax at source in terms of the provisions of section 194A, has been cast on the payer of the interest income in terms of section 204 of the Income-tax Act. Where the payer is a company, the company itself including the principal officer thereof will be responsible for deducting tax at source. In the case of banks, which are generally companies, the banks themselves will be responsible for deducting tax at source. However, since the bank branches maintain their separate accounts and pay interest to the depositors, the officer in charge of the branch is expected to deduct tax at source and also comply with other legal obligations as discussed in the succeeding paragraphs. 11. The procedure regarding deduction of tax at source is contained in sections 200, 201, 203, 203A, 206 and 206A of the Income-tax Act, 1961, and in rules 30, 31, 36A, 37 and 114A of the Income-tax Rules, 1962. According to the provisions of section 200 of the Income-tax Act, any person deducting tax in accordance with the provisions, inter alia, of section 194A, shall pay, within the prescribed time, the tax so deducted to the credit of the Central Government. In the case of deduction by or on behalf of the Government, the tax is required to be paid on the day of the deduction itself. In other cases, generally, the payment is to be made within one week of the last day of the month in which deduction is made. In special cases, the Assessing Officer, with the approval of the Deputy Commissioner, can also permit a tax deductor to pay the income-tax deducted at source on quarterly basis. For this purpose, a consolidated application may be made by the head office of the bank on behalf of all its branches to the concerned Assessing Officer. The Assessing Officer can also grant a consolidated permission in respect of all the branches of the concerned bank. Once such a permission is granted, it will not be necessary for each branch of the bank to obtain separate permission in its case. If a person fails to deduct tax at source or, after deducting, fails to pay it to the credit of the Central Government, he shall be liable to action under the provisions of section 201. Sub-section (1A) of section 201 lays down that such person shall be liable to pay simple interest at the rate of fifteen per cent. per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Further, section 271C lays down that a person who fails to deduct tax at source shall be liable to pay, by way of penalty, a sum, equal to the amount of tax which he failed to deduct at source. In this regard, attention is also invited to the provisions of section 276B of the Income-tax Act which lays down that if a person fails to pay to the credit of the Central Government the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine. 12. Further, according to the provisions of section 203 of the Income-tax Act, 1961, every person responsible for deducting tax at source is required to furnish a certificate to the payee to the effect that tax has been deducted and to specify therein the amount so deducted, the rate at which tax has been deducted and other prescribed particulars. The certificate has to be furnished within the period prescribed by rule 31(3) of the Income-tax Rules, 1962. The certificate for tax deduction under section 194A has to be issued generally within one month and fourteen days from the date of credit or payment of interest, in Form No. 16A. If the payer fails to furnish this certificate, he shall be liable to pay, under section 272A of the Income-tax Act, by way of penalty, a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues. 13. Under the provisions of section 203A of the Income-tax Act, 1961, it is obligatory for all persons responsible for deducting tax at source to obtain a tax deduction account number (TAN) from the concerned Assessing Officer, and quote the same in the TDS certificates and the challans and returns relating to TDS. Detailed instructions in this regard are available in this Department's Circular No. 497 dated 9-10-1987 (See [1988] 169 ITR (St.) 54). A copy of the Form No.49B, for making the application for obtaining the TAN from the Assessing Officer is enclosed for ready reference. If a person fails to comply with the provisions of section 203A, he shall be liable to pay, under the section 272BB of the Income-tax Act, by way of penalty, a sum which may extend to Rs.5,000. 14. According to the provisions of section 206 of the Income-tax Act, read with rules 36A and 37 of the Income-tax Rules, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association and every other person responsible for deducting tax under the provisions of Chapter XVII of the Income-tax Act (which includes section 194A) shall, within the prescribed time after the end of each financial year, prepare and deliver, or cause to be delivered to the prescribed income-tax authority, the annual return of deduction of tax at source. The return in respect of tax deducted at source under section 194A is required to be filed by 30th day of June (following the financial year) in which the tax is so deducted. The annual return has to be filed on Form No. 26A. If a person fails to furnish in due time the annual return, he shall be liable to pay, under section 272A of the Act, by way of penalty, a sum which shall not be less than Rs.100 but which may extend to Rs. 200 for every day during which the failure continues. However, the amount of penalty shall not exceed the amount of tax which was deductible at source. 15.1 Section 206A, read with ruel 37AA, provides that a person paying interest to a resident without deduction of tax at source has to furnish an annual return giving details of such interest paid. This return is to be filed in Form No. 27A and is to be furnished within 30 days from the end of the financial year in which such interest has been paid. If a person fails to furnish in due time the annual return, he is liable to pay, under section 272A of the Act, by way of penalty, a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the default continues. 15.2 Further, sub-section (2) of section 197A provides that the person responsible for paying the interest income is to deliver one copy each of the declaration on Form No.15H, referred to in paragraph 7, to the concerned Chief Commissioner of Commissioner before the 7th day of the month next following the month in which the declaration is furnished to him. Failure to deliver copies of this form will attract penalty under section 272A on the above lines. 16. Deduction of tax in the case of joint accounts.--Doubts may sometimes arise in this connection about the manner of deducting tax at source from interest income on deposits in joint names. Reference for this purpose may please be made to the Board Circular No.256 dated 29-5-1979 (See [1980] 126 ITR (St.) 22). An extract from this circular in reproduced below for ready reference. "...in the case of a deposit in joint names, say in two names, in the absence of any proof to the contrary, both the persons can be treated as payees, for the purpose of deduction of tax under section 194A of the Act. As such, unless the person paying the interest on such deposit(s) has definite information about the beneficial ownership of the deposit(s), the interest payable under a joint account can be aggregated with the amount of interest payable by that person to any one of the payees in their separate or independent accounts. The persons responsible for deducting the tax are advised that, in the absence of any information to the contrary, they may aggregate the interest on a joint account with the interest on deposit in the individual's account who has higher interest income. Thus, if there is a deposit of Rs. 5,000 in a joint account of M/s. XV and there are deposits of Rs. 4,000 in the name of X and Rs. 3,000 in the name of Y with the same payer, the rate of interest being 12% per annum, the payer may aggregate the interest in the joint account amounting to Rs. 600 with the interest of Rs. 480 on the deposit of X and since the aggregate interest during the financial year exceeds Rs.1,000 (this limit has since been raised to Rs.2,500) he may deduct the tax at the prescribed rate. The fact that the joint account may be styled as M/s. YX instead of M/s. XY will not make any difference." 17. These instructions are not exhaustive and are issued with a view to helping the persons responsible for making deduction of tax at source under section 194A of the Income- tax Act. However, where there is any doubt, a reference may be made to the relevant provisions of the Income-tax Act, 1961, and the Finance (No.2) Act, 1991. In case any assistance is needed, the Income-tax Officer concerned or the local Public Relations Officer of the Income-tax Department may please be approached. (Sd.) Rajesh Chandra, Under Secretary, Central Board of Direct Taxes. FORM NO. 15A [See rule 29A] Statement under the proviso to section 194A(1) of the Income-tax Act, 1961, relating to deduction of tax from income by way of interest other than income chargeable under the head "Interest on securities" FORM NO. 15H [See rule 29C(3)] Declaration under section 197A(1) of Income-tax Act, 1961, to be made by an individual claiming receipt of interest other than "interest on securities" without deduction of tax FORM NO. 16A [See rule 31(1)(b)] Certificate of deduction of tax at source under section 203 of the Income-tax Act, 1961 [For interest on securities; dividends; interest on time deposits referred to in clauses (vii) and (viia) of sub-section (3) of section 194A; insurance commission; payments in respect of deposits under National Savings Scheme; payments on account of repurchase of units by the Mutual Fund or Unit Trust of India; commission, remuneration or prize on sale of lottery tickets; commission or brokerage; income from units referred to in section 196B]
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