Interest other than securities, taxed under Section 194A of Income Tax Act 1961, includes earnings from deposits and borrowings. Understanding when TDS applies ensures smooth tax compliance and prevents excess deductions.

What is TDS on Interest other than interest on securities [Section 194A]?

1) Applicability of TDS on interest other than securities Section 194A

• Applies to interest income other than securities (e.g., FD, RD, loan interest).
• Deduction is required when such interest is paid or credited by entities other than individuals or HUFs.
• Individuals or HUFs are also liable to deduct TDS if:
  • a) Their business turnover exceeds ₹1 crore or
  • b) Their professional receipts exceed ₹50 lakhs in the preceding financial year.

2) When to Deduct TDS under Section 194A?

TDS under Section 194A must be deducted at the earlier of the following events:

• When the interest is credited to the account of the payee, or
• When the interest is actually paid in cash, cheque, draft, or any other mode.

Even if the interest is credited to a separate account in the books of the payer, such as an “Interest Payable Account” or “Suspense Account,” it will still be considered as credited to the payee’s account, and TDS deduction becomes applicable.

CBDT Clarification (Circular No. 3/2010, dated 2-3-2010):

• For banks using Core Banking Solutions (CBS) software, daily or monthly interest provisioning for monitoring purposes will not be treated as credit to the depositor’s account.
• In such cases, TDS under Section 194A must be deducted at the end of the financial year, on maturity, on encashment, or at periodic intervals as per the bank’s practice or depositor’s request.
• Deduction is required only when the aggregate interest exceeds the threshold limit specified in Section 194A.

Note: The due date for depositing TDS will be reckoned from the date when the interest is constructively credited to the payee’s account.

What is the Rate of TDS ?

TDS under Section 194A is deducted at a flat rate of 10% on interest income. This rate applies to both resident individuals, non-corporate assessees, and domestic companies.

The rates are notified every year in the Annual Finance Act (Part II of the First Schedule), and no surcharge or cess is added when deducting TDS on such interest.

Cases Where TDS under Section 194A is Not Applicable

TDS under Section 194A is not applicable in the following cases:

1. Threshold Limit Exemption

• No TDS if total interest paid or credited during a financial year does not exceed ₹5,000.
• Higher threshold of ₹40,000 (₹50,000 for senior citizens) applies where the payer is:
  • A banking company
  • A co-operative society engaged in banking business
  • A post office under notified schemes (e.g., Senior Citizens Savings Scheme, 2019 and Mahila Samman Savings Certificate, 2023).
  • For banks and co-operative societies using Core Banking Solutions (CBS), the limit is calculated across all branches, not per branch.

2. Specific Exempt Payments

• Interest paid by a firm to its partners.
• Interest on deposits under notified schemes framed by the Central Government.
• Interest on deposits (other than time deposits made after 1.7.1995) with banks covered under the Banking Regulation Act, 1949.
• Interest paid by a co-operative society (other than a co-operative bank) to:
  • Its own members, or
  • Another co-operative society.

3. Deposits with Certain Co-operative Institutions

No TDS on interest from deposits with:

• Primary agricultural credit societies
• Primary credit societies
• Co-operative land mortgage banks
• Co-operative land development banks
• Other co-operative societies engaged in banking (except time deposits made after 1.7.1995).

Important: If such a co-operative society has turnover exceeding ₹50 crores in the preceding financial year and interest exceeds ₹40,000 (₹50,000 for senior citizens), it must deduct TDS.

4. Exempt Interest Payments by Government & Institutions

• Interest paid by the Central Government under the Income Tax Act.
• Interest paid to:
  • Banking companies and co-operative banks (including land mortgage banks)
  • Financial corporations established under Central/State law
  • LIC of India
  • Insurance companies (including co-operative societies carrying on insurance business)
  • Unit Trust of India (UTI)
  • Notified institutions, such as National Skill Development Fund and HUDCO.

5. Special Cases of Exemption

• Compensation awarded by Motor Accident Claims Tribunal (MACT).
• No TDS if total interest paid in a year does not exceed ₹50,000.
• Zero Coupon Bonds: No TDS on interest payable by infrastructure capital companies, funds, infrastructure debt funds, public sector companies, or scheduled banks on such bonds issued after 1.6.2005.

Key Definitions for Clarity

• Time Deposits: Includes fixed deposits and recurring deposits repayable after a fixed period.
• Senior Citizen: An Indian resident aged 60 years or above during the financial year.

Compliance Note (Section 206A)

Banks, co-operative societies, or public companies must submit a statement to the Income Tax Department when:

• Interest paid does not exceed ₹40,000 (₹5,000 in other cases).
• Payment is by way of interest other than securities.
• Statement must be filed in the prescribed form with the DGIT (Systems) or authorized authority.

Power of the Central Government to Issue Notifications under Section 194A

The Central Government has the power under Section 194A to issue notifications allowing either non-deduction of TDS or deduction at a lower rate. Such notifications may apply to specific payments, persons, or classes of persons as notified by the government.

These exemptions or relaxations help reduce unnecessary compliance where tax deduction is not required in the public interest.

Example of TDS Applicability of TDS on interest other than securities Section 194A

•  Mr. Harish (FD with Co-operative Bank):
  • Fixed deposit: ₹10,00,000 @ 9% for 6 months
  • Interest earned: ₹45,000
  • TDS @10% = ₹4,500 (since interest exceeds ₹40,000 limit).
• Mr. Ganesh (FDs in Multiple Branches of CBS Bank):
  • Three deposits of ₹3,00,000 each @ 9%
  • Total interest (all branches): ₹60,750
  • TDS @10% applicable (since aggregate interest > ₹40,000).
• Mr. Rajesh (Recurring Deposit):
  • Monthly deposit: ₹2,00,000 for 6 months @ 8%
  • Interest earned: ₹28,000
  • No TDS, as interest ≤ ₹40,000.

key Point in Section 194A :

Under Section 194A, TDS @10% is deducted when annual interest from FDs/RDs exceeds ₹40,000 (₹50,000 for senior citizens), considering CBS banks aggregate across branches.