Did you know banks deduct some amount of money while they credit interest on fixed deposit every year? That is nothing but TDS under section 194A. 

Read on to understand the implications of Section 194A of the Income Tax Act in detail. 

What is Section 194A?

Section 194A of the Income Tax Act states that tax has to be deducted at source on interest (other than interest on securities). Such interest includes interest paid on an unsecured loan, interest paid by banks on fixed deposits, interest paid on loans & advances, etc. 

This section is applicable only to resident individuals, i.e., section 194A doesn’t apply to the interest payments made to a non-resident. 

When is TDS deducted under Section 194A?

The payer will deduct TDS under section 194A if the interest amount in a financial year exceeds –

  1. Rs 40,000 where the payer is a banking company, financial institution, or a co-operative society engaged in the banking or post office 
  2. Rs 50,000 if interest is paid to senior citizens
  3. Rs 5,000 in any cases other than (1) and (2)

The recipient can provide Form 15/Form 15H to the payer so that TDS will not be deducted.  

Who is responsible to deduct TDS? 

  • Individuals and Hindu Undivided Families (HUFs) who are liable to tax audit under section 44AB in the preceding financial year
  • All other assessees like partnership firm, company, Association of Persons (AOP), and Body of Individuals (BOI)

What is the rate of TDS under section 194A?

Any person making eligible interest payments under section 194A will have to deduct 10% TDS while making the interest payment to a resident individual. 

As a COVID-19 relief measure, the income tax department has reduced TDS rate under section 194A to 7.5% for the interest paid between 14th May 2020 and 31st March 2021.

If the individual does not furnish PAN, TDS will be deducted at the rate of 20%. 

What is the time limit for depositing TDS?

The payer who has deducted TDS under section 194A will have to deposit TDS amount within the following due dates. 

Months Due Date
For April to February  7th of the next month
For March On or before 30th April

 

[Also Read – A 7-step checklist to help you wrap up FY 2020-21 error-free]

Interest on late payment or non-payment of TDS

If TDS is not deducted, an interest of 1% per month will apply from the due date of deduction to actual date of deduction.

If TDS is not deposited on time, an interest of 1.5% per month will apply from the actual date of deduction to the actual date of payment. 

What type of interests are exempted under section 194A?

Interest paid 

  • To any bank, financial institution, LIC India, any company or a co-operative society engaged in the insurance business
  • By a partnership firm to its partners
  • To members by a co-operative society

Interest that does not exceed 

  • Rs 40,000 where the payer is a banking company, any bank, banking institution, post office, co-operative society engaged in the business of banking
  • Rs 5,000 in any other case and Rs 50,000 in case of senior citizens

Which TDS return has to be filed under Section 194A?

The payers who are required to deduct TDS have to file Form 26Q to report all the interest paid and tax deducted thereon. 

Form 26Q is a quarterly statement filed by the deductors to report TDS on all payments other than salary. This form is used for TDS on professional fees, rent, interest payments, etc. 

When is the due date of Form 26Q? 

Quarter Due Date 
April to June (Q1) 31st July of the same FY 
July to September (Q2) 31st October of the same FY
October to December (Q3) 31st January of the same FY
January to March (Q4) 31st May of the next FY

What are the penalties for late filing of Form 26Q?

Particulars Minimum Penalty Maximum Penalty
Late filing of Form 26Q (Penalty under Section 234E) Rs 200 per day until TDS return is filed Penalty amount should not exceed the TDS amount
Non- filing of Form 26Q (Penalty under Section 271H) Rs 10,000 Rs 1,00,000

 

No penalty will be charged if 

  1. The payer deposits TDS to the government
  2. Late filing fees and interest are paid 
  3. Return is filed before completion of 1 year from the due date

Whether TDS is deducted on interest on delayed payment of purchase bills?

No TDS is deducted on interest on delayed payment of purchase bills under section 194A

When is tax deducted at nil rate or lower rate?

Case 1– When a deductee submits Form 15G/15H to the deductor along with their PAN, then no TDS will be deducted by the deductor. Form 15G/15H can be submitted only when the following conditions are satisfied.

  1. Deductee is a person other than a company or a partnership firm 
  2. Tax liability of the particular FY is NIL
  3. Total income does not exceed the basic exemption limit under income tax. However, this condition is not applicable to resident senior citizens

Case 2 – When a deductee submits Form 13 under section 197 of the Income Tax Act to an assessing officer. The officer authorises a certificate for lower tax deduction (or deduct no tax)

Automate your TDS payments with RazorpayX Payroll

As a business, you surely have payments or expenses apart from salaries that are subjected to TDS like professional fees, interest, rent, etc. You have to deduct TDS accurately and file quarterly returns, providing details of all business payments and tax thereon. 

If you execute these errands manually, it becomes a tedious and labour-intensive task. It takes a significant amount of time to complete the entire filing process (depending on the number of payments made). 

So, instead of things getting out of control, you can simply automate your payroll process and not worry about compliance.

And, we have the perfect solution for you – RazorpayX Payroll Software!

With our payroll software, you not only can automate TDS payments & filings but also automate your entire payroll process. It provides best-in-class services to startups and small businesses at affordable pricing.  

The software eliminates manual efforts in executing payroll and compliance. It automates payments like TDS, PF, ESI, and PT along with their periodic filings, salary disbursement, reimbursements, leave management, and much more. 

Choose RazorpayX Payroll and never miss out timely salary payments, tax deductions, TDS payments, & their return filings. 

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Writer-by-chance and overthinker-by-choice, raging a war against the Pineapple-on-pizza brigade

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