Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

[Section 194A]- Interest other than Interest on Securities

Interest other than Interest on Securities includes payments made in respect of:

(i)         Inter-corporate deposits / loans,

(ii)        Public deposits,

(iii)       Loans,

(iv)       Suppliers on late payment of Acts (also where payments routed through bank),

(v)        Payment by consignor to commission agent.

[Section 194A]- Interest other than Interest on Securities
[Section 194A]- Interest other than Interest on Securities

1.   Who is liable to Deduct Tax from Interest other than Interest on Securities:

The person (other than an individual or a Hindu Undivided Family) who is responsible for paying to a resident any income by way of interest other than ‘interest on securities’, is required to deduct tax thereon at the rates in force.

Individuals and HUF whose total sales / turnover / receipts from the business / profession carried on by him in the immediately preceding financial year exceeded the monetary limit specified under section 44AB(a) or (b), are also required to deduct tax at source. [First proviso to section 194A (1)]

Amendment made by the Finance Act, 2020

Since the limit of tax audit under section 44AB(a) has been increased from 1 crore to 5 crore in certain cases, the Act has amended the above proviso as under:

W.e.f. 1.4.2020, individuals and HUF whose total sales/turnover/receipts from the business/profession exceed Rs. 1 Crore in case of business or Rs. 5 Crore  in case of profession shall be required to deduct tax at source.

Person responsible for TDS:

In the case of credit or, as the case may be, payment or any other sum chargeable under the provisions of this Act, the payer himself, or, if the payer is a company, the company itself including the principal officer thereof.

2.   When TDS is to be Deducted from Interest other than Interest on Securities:

Tax is to be deducted either at the time of payment of interest in cash or by issue of cheque or draft or by any other mode or credit of it to any account, whichever is earlier.

Where any income by way of interest as aforesaid is credited to any account whether called “Interest payable account” or “Suspense Account” or by any other name in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee.

Tax not to be deducted at source in respect of the provision for interest accrued but not due:

The whole scheme of TDS proceeds on the assumption that the person whose liability is to pay an income knows the identity of the beneficiary or the recipient of the income. In this view of the matter. TDS mechanism cannot be put into practice until identity of the person in whose hands it is includible as income can be ascertained.

3.   TDS U/s 194A of the Act on interest on Fixed Deposit made on directions of Courts

It is clarified that interest on FDRs, made in the name of the Registrar General of the Court or the depositor of the fund on the directions of the Court, will not be subject to TDS till the matter is decided by the Court However, once the Court decides the ownership of the money lying in the fixed deposit, the provisions of section 194A will apply to the recipient of the income.

4.   [Section 194A(4)]- Adjustment in the amount of TDS:

The person responsible for making the interest payment may at the lime of making any deduction, increase or reduce the amount to be deducted for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year.

5.   [Section 194A (3)]- Where No Tax is to be Deducted at Source.

(A)   When interest paid or credited does not exceed Rs. 40,000 / Rs. 50,000 / Rs. 5,000

As per section 194A(3)(i), no tax is to be deducted at source if the aggregate amount paid or credited to account of payee during the financial year does not exceed:

(a)     Rs. 40,000 [ Rs. 50,000  in case of a Senior Citizen], where the payer is 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);

(b)     Rs. 40,000  [ Rs. 50,000 in case of a Senior Citizen], where the payer is a co-operative society engaged in carrying on the business of banking;

(c)      Rs. 40,000  [ Rs. 50,000 in case of a Senior Citizen], on any deposit with post office under any scheme framed by the Central Government and notified by it in this behalf; and

(d)          Rs. 5,000 in any other case:

(B) Where such interest is paid to certain specified persons

As per section 194A(3)(iii), where such income is credited or paid to the following persons, no tax is required to deducted at source if such income is credited or paid to—

(1)     (a)          any banking company to which the Banking Regulation Act, 1949 applies or a cooperative society engaged in the banking business (including a cooperative land mortgage bank) [Section 194A(3)(iii)(a)], or

(b)     any financial corporation established by or under a Central, State or Provincial Act [Section 194A(3)(iii)(b)];

(c)           the Life Insurance Corporation India [Section 194A(3)(iii)(c)];

(d)          the Unit Trust of India [Section 194A(3)(iii)(d)]; or

(e)     any company or co-operative society carrying on the business of insurance [Section 194A(3)(iii)(e)];

(f)      such other institution association or body or their class as the Central Government may notify in the Official Gazette [Section 194A(3)(iii)(f)j;

(2)        a partner of the firm, where payer of interest is firm [Section 194A(3Xiv)J;

(3)     a member of a co-operative society or any co-operative society where payer is a co-operative society [Section 194A(3)(v)],

(4)    a depositor in respect of deposit in a notified scheme framed by the Central Government (e.g. Post Office time deposits, monthly income account, National Saving Certificates, Kisan Vikas Patras, Indira Vikas Patras, etc.) Tax is however, deductible in case of senior citizen scheme [Section 194A(3)(vi)];

(5)     Any assessee where interest is on account of recurring deposit and saving account with banks or co-operative societies other than mentioned in clause (6) below [Section 194A(3)(vii)];

(6)     (a)          any depositor in respect of deposit with a primary agricultural society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank:

(b)     any depositor in respect of deposit with a banking company or of a co-operative society (other than a society referred to in clause (a) above engaged in banking business where time deposits have been made before 1.7.1995 [Section 194A(3)(viia)]:

(7)       (a)        Any assessee where interest is payable to him under direct tax laws;

(b)     An assessee where interest is credited to his Non-Resident (External) Account [Section 194A(3)(viii)];

(8)    any income credited by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal [Section l94A(3)(ix)];

(9)     any income paid by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income paid during the financial year does not exceed fifty thousand rupees [Section 194A(3)(ixa)];

(10)   Any assessee on such income which is paid or payable by an infrastructure capital company or infrastructure capital fund or a public sector company or a scheduled bank in relation to a zero coupon bond issued on or after 1.6.2005 by such company or fund or public sector company or a scheduled bank [Section 194A(3)(x)];

(11)   A business trust if such income is by way of interest referred to in section l0(23FC) [Section 194A(3)(xi)].

(C)   Where a Self-declaration under Form No. 15G/15H is furnished by a particular person [Section 197A(1A). (1B) and (1C)]:

A person, other than a company or firm may furnish a declaration in writing in duplicate in new Form No. 1 5G to the payer to the effect that there is no tax payable on his Total Income. In this case, the payer shall not deduct any tax at source.

However, as per section 197A (1B), the assessee cannot furnish the declaration under this clause if the aggregate amount of the following incomes credited or paid or likely to be credited or paid during the previous year in which such income is to be included exceeds the maximum amount which is nor chargeable to tax:

(1)        Payment from accumulated balance of recognized provident fund, if taxable.

(2)        Interest on securities

(3)        Interest other than interest on securities

(4)        Payment in respect of life insurance policy, if taxable.

(5)        Insurance commission

(6)        Payment in respect of deposit under National Saving Scheme.

(7)        Payment in respect of rent.

Notwithstanding anything contained in section 197A(1B), above, no deduction of tax shall be made from the above incomes in the case of an individual resident in India who is of the age of 60 year or more at any time during the previous year, if such individual furnishes to the payer, a declaration in writing in duplicate in Form No. 15H to the effect that the tax on his estimated total income of the previous year in which the above income is to be included in computing has total income will be Nil.

In the case of such senior citizen, the income from the above sources can be more than the maximum amount which is not chargeable to tax but the tax on his estimated total income, inclusive of such incomes, should be nil.

As per section 206AA(2), declaration under Form No. 15G or 15H shall not be valid if it does not contain the permanent account number of the declarant. In case any declaration becomes invalid, the deductor shall deduct the tax @ 20% except where the payment is made from accumulated balance of recognised provident fund where it will be deducted at the maximum marginal rate.

The payer of the income is required to deliver to the Principal Commissioner or Commissioner one copy of declaration given under new Form 15G on or before the 7th day of month next following the month in which the declaration is furnished to him.

(D) No TDS by the Offshore Banking Unit [Section 197A(1D)]

No TDS made by the Offshore Banking Unit from the interest paid –

(a)     on deposit made on or after the 1st day of April , 2005, by the non-resident or a person not ordinarily resident in India ; or

(b)     on borrowing, on or after the 1st day of April, 2005, from a Non-resident or a person not ordinarily resident in india.

(E)   [Section 197A(1E)]- Any payment made to New Pension Scheme Trust:

No deduction of tax shall be made from any payment to any person for, or on behalf of, the New Pension System Trust referred to in section 10(44).

(F)   [Section 197A(1F)]- No deduction of Tax from Specified payment to Notified institutions, association or body, etc.:

No deduction of tax shall be made from such specified payment to such institution, association or body or class of institutions, associations or bodies as may be notified by the Central Government in the Official Gazette, in this behalf.

No tax shall be deducted at source from the payments of the nature specified under section 10(23DA) received by any securitisation trust.

(G) Certain entities required to file return under section 139(4A) or 139(4C) [Rule 28AB]:

As per Rule 28AB certain entities who are required to file the return of income under section 139(4A) or 139(4C) may apply under Form No. 13 for no deduction of tax at source provided certain conditions are satisfied.

(H) Certain entities whose income is unconditionally exempt under section 10:

 In case of certain entities whose income is unconditionally exempt under section 10 and who are statutorily not required to file return under section 139 there will be no requirement for TDS since their income is in any way exempt.

6.   Where the TDS either not to be deducted or to be deducted at Lower Rate [Section 197 Rule 28 and 28AA]

The assessee to whom interest is payable may make an application in Form No. 13 for obtaining a certificate for deduction of tax at any lower rate or no deduction of tax, as the case may be.

An application by a person for grant of a certificate for the deduction of income-tax at any lower rates or no deduction of income-tax, as the case may be, under section 197(1) shall be made in Form No. 13 electronically,—

(i)           under digital signature; or

(ii)          through electronic verification code.

Where such certificate is given, it will be valid for such period of the previous year as may be specified in the certificate and the person responsible for paying such interest, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rate specified in such certificate or deduct no tax, as the case may be.

The certificate for deduction of tax at any lower rates or no deduction of tax, as the case may be, shall be issued except in certain cases direct to the person responsible for deducting the tax under advice to the person who made an application for issue of such certificate

However, as per section 206AA(4), no certificate under section 197 shall be granted unless the application made in Form No. 13 under that section contains the Permanent Account Number of the applicant.

7.   Rate of TDS for Financial Year 2019-20 and 2020-21

1. In case the payee is a person other than a company resident in India 10%
2. In case the payee is a domestic company 10%

Note : –

(1)        The Rate of TDS will be 20% in all cases, if PAN is not quoted by the deductee.

(2)     No surcharge, or health and education cess (H&EC) will be added. Hence, TDS shall be deductible at basic rates.

See also  Service of Notice under the Income-tax Act [Sections 282 to 284]
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