December 30, 2022
Swathi v prabhu

Section 194A of the income tax act

Lending institutions are required to deduct a certain percentage of tax while crediting interests on fixed deposits annually. This deduction falls under section 194A of the income tax act. This tax is applicable on interest repaid on secured and unsecured credit forms.

Section 194A states that an individual is liable to pay tax on interest sources. It includes interest paid on fixed deposits, advances, and loans. TDS deducted under section 194A of the income tax act is payable only to a resident.

Certain conditions should be considered before paying this tax. The government requires certain terms and conditions to be fulfilled before paying the tax.

Let us understand a bit more about this section 194A of the income tax act.

Who are liable to pay tax under this section

The following individuals are required to pay tax under this section

1. Income tax assesses such as companies, partnership firms, a body of individuals

2. Individuals and HUF who are liable for assessment under section 44AB in the preceding year

3. Individuals or HUF whose annual turnover exceeds Rs.1 crore in case of business and Rs.50 lakh in case of the profession during the year in which interest is paid or credited

The mentioned individuals are liable to pay TDS under section 194A.

When does TDS under Section 194A need to be deducted?

It is liable to deduct tax by a tax deductor or payer if the interest amount is credited or likely to be credited in the current financial year.

The amount will exceed Rs.40, 000 where the payer is:-

1. Co-operative society in a credit lending business

2. Lending institutions

3. Post office (where the government notifies to pay the deposit)

No TDS is deductible from interest earned up to Rs.50, 000 under 194A for senior citizens from FY 2018-19

The tax deduction under section 194A specifies the following sources of interest income:-

1. Bank deposit

2. Schemes on recurring deposit

3. Post office deposit

4. Fixed deposit schemes

When is tax deducted at the NIL rate or lower rate?

Tax deduction at nil rate or lower rate happens in the following scenarios

A. When a declaration is submitted using form 15G or 15H, per section 197A                                      

No tax is deductible if the following criteria are met, and a section 197A declaration is provided to the payer along with their PAN:

1. The recipient is a business rather than an organization

2. The full amount of tax for the previous year is nil

3. The total income of the individual other than a local senior citizen is below the exemption threshold limit (2,50,000, 3,00,000, or 5,00,000)

4. This declaration must be made in duplicate using form 15G (15H for senior citizens). Investors may submit a senior citizens saving scheme (SCSS) declaration, established in 2004

5. The declaration may be presented by the nominee of the investor in case of the death of the depositor

6. Banks will not be allowed to deduct taxes from interest payments upon submission of the declaration

B. When a section 197 application is presented in Form 13

1. As per the requirements of section 197, the recipient may submit an application in Form 13 to the assessing officer to get a certificate allowing the taxpayer to withhold tax at a lesser rate

2. There is no deadline for applying. It can be done whenever the tax is deducted. However, the recipient cannot apply for the certificate if he does not have a PAN

3. The certificate must contain a warning on plain paper to the applicant directly who is in charge of paying income

4. Retrospective issuance of the certificate is not permitted

5. In exchange for lesser or no source tax deduction, the beneficiary may give a copy of the certificate to the person responsible for collecting the income.

What is the rate of tax?

The applicable tax rates for deduction under section 194A are as follows:

1. 10% at the time PAN is provided (7.5% for interest credited between 14 May 2020 and 31 March 2021 as a Covid relief mechanism)

2. 20% deducted if the pan is missing

3. The previous rates shall not be subject to any additional fees, education cess, or SHEC. Tax will be therefore taken out at the source of the basic rate.

What is the time limit for depositing TDS?

1. Taxes deducted from paychecks between April and February must be deposited by the 7th of the month, at the latest.

2. Taxes withheld in March must be deposited by April 30th at the latest.


1. Is TDS deducted on interest against a loan paid to a bank?

If the interest is paid to a bank by an individual or a company against the loan, the TDS provisions will not be applicable.

2. What is the 194A TDS rate?

When the payee provides the PAN, the TDS rate is 10%. 

3. Is it mandatory to pay interest on an unsecured loan?

No, paying interest is not necessary.

4. What is the limit of TDS on interest?

Section 194A states that no tax will be deducted if the total interest paid during the financial year is less than Rs. 5,000. Once the interest payment surpasses Rs. 5,000, the total amount must be taxed.


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