Section 194A of Income Tax Act: Understanding Tax Deducted at Source (TDS) in India

Last Updated : March 10, 2023, 6:13 p.m.

TDS stands for Tax Deducted at Source, and it’s a simple and efficient way of collecting income tax in India. Instead of the recipient having to pay their taxes all at once, the tax is deducted automatically as a portion of their income. The person responsible for paying the income (the payer) takes care of deducting the tax and sends it directly to the government on behalf of the payee. This system helps make sure taxes are collected promptly and efficiently. The following article covers details about TDS under Section 194A of the Income Tax Act.

What is Section 194A?

It is important to note that Section 194A of the Income Tax Act in India is all about making sure that the right amount of tax is deducted when interest income is paid to residents. If someone pays you interest (not including interest on securities), they’re responsible for deducting a portion of that money as TDS. The TDS must be taken out either when the interest is credited to your account or when the payment is made, whichent gets its share of the taxes due.

Deduction of TDS is under section 194A only when payments are made to a resident. TDS on payment made to non-residents is regulated by section 195.ver comes first. This method is just a way to make sure that the government.

TDS Key Payment Types

TDS Key payment Types refer to the specific payment type for which the provision for Tax Deducted at Source (TDS) applies. These payment types include:

• Interest (other than interest on securities)
• Interest in Securities
• Fees for professional/technical services/ royalty

Apart from that, TDS is applicable for other varieties of payments, including salary, interest, commission, brokerage, professional fees, royalty, and more.

Understanding the Function of Section 194A with Example

Let’s say you, as a resident individual, earn interest from a bank. The bank is responsible for deducting TDS from the interest income at the time of payment. The bank would calculate the TDS amount based on the rate prescribed by the government and deduct the same from the interest payable to the individual.

For instance, if the interest earned by the individual is Rs 100,000 and the TDS rate is 10%, the bank would deduct Rs. 10,000 as TDS and pay the remaining Rs. 90.000 to the individual.

The bank would then issue a TDS certificate in the form of Form 16A to the individual, which would serve as proof of the TDS deducted. The individual can claim credit for the TDS deducted when filing their tax returns.

It is important to note that if the individual does not provide their Permanent Account Number (PAN) to the bank, the bank will deduct TDS at a higher rate of 20%. Hence, it is advisable for the individual to provide their PAN to the bank to avoid higher TDS deductions.

Entities Responsible for Deducting TDS Under this Section

As per Section 194A of the Income Tax Act, tax deduction at source is mandatory for entities other than an individual or Hindu Undivided Family (HUF) that are responsible for paying interest (other than interest on securities) to a resident. This includes banks, post offices, companies, firms, an association of persons, and other parties.

However, if an individual or HUF’s total sale, gross receipts, or business/ professional turnover exceeds INR 1 crore (for business) or INR 50 lakhs (for the profession) in the financial year preceding the year in which the interest is credited or paid, they must deduct TDS under Section 194A.

Timing of TDS Deduction

The TDS must be deducted when the payment or when the credit occurs (to any account by any name), whichever occurs earlier. An exception is made in case of interest on compensation awarded by the Motor Accident Claims Tribunal, which is subject to TDS only if the interest amount exceeds Rs. 50,000, and the tax needs to be deducted at the time of payment.

For example: Let’s say X industries, a partnership firm, takes a loan of Rs. 8,40,000 from Mr Groot, who resides in Mumbai and is a friend of one of the firm’s partners. The interest for the financial year 2022-23 is Rs. 84,000. In March 2023, the interest is credited to Mr Groot’s account but is paid in May 2023. In this scenario, the TDS needs to be deducted by the firm either in March 2023 (when interest was credited) or in May 2023 (when payment was made).

No TDS Deduction

In India, the tax must be deducted at source (TDS) on various incomes, including intestate income. However, there are certain circumstances when TDS need not be deducted. These include:

• If the aggregate interest credited or paid to the recipient of time deposits falls under the specified limit during the financial year.
• If an Indian senior citizen has a time deposit with a banking company, and the interest earned on the deposit in a financial year is 50,000.
• As per 197A, If an individual who is resident in India provides a declaration in writing in Form 15G or Form 15H stating that their income is below the exemption limit (2, 50,000) or 3,00,000 or 5,00,000.
• A certificate for lower or nil deduction of tax can be issued to the person responsible for exceeding 100, and their details are not available under the income-tax (11th Amendment) rules, 2017.
• Interest paid by a partnership firm to its partners is exempt from tax deduction under section 194A of the tax laws.

Conclusion

TDS must be deducted at the time of payment by the entity responsible for TDS, as per provisions laid down by the government. The recipient of the payment must provide their Permanent Account Number (PAN) to the entity responsible for TDS, who must then file a TDS certificate with the government within the specified time frame. The recipient of the payment can then claim credit for the TDS deducted when filing their tax returns. It is important to note that the provisions of TDS are subject to change, and one must stay updated with the latest provisions of the income-tax Act for accurate compliance.