TDS on Interest Payments: Calculation and Reporting Methods
Interest income is a common source of earnings for many individuals and businesses, but it also attracts tax obligations under Section 194A of the Income Tax Act. The government requires deductors to withhold tax at the source before paying interest to the recipient. Understanding TDS on interest payments, its calculation, exemptions, and reporting requirements ensures compliance and prevents penalties.
What is TDS on Interest Payments (Section 194A)?
Section 194A governs the deduction of TDS on interest other than interest on securities. It ensures that tax is collected at the source from income earned through interest on deposits, loans, and other non-securitized instruments.
Scope of Section 194A
The provision covers interest paid by banks, co-operative societies, and other institutions on deposits, as well as by individuals or entities paying interest on loans or advances for business purposes. However, it excludes interest paid on securities such as government bonds or debentures, which are covered under other sections.
Difference Between Interest on Securities and Other Interest
- Interest on securities: Includes income from government securities, bonds, or debentures, covered under separate TDS provisions like Section 193.
Other interest: Includes interest on fixed deposits, recurring deposits, loans, and advances, covered under Section 194A.
Applicability of TDS on Interest Payments
Not every interest payment attracts TDS. The applicability depends on the payer’s profile, the payee’s status, and the amount of interest credited or paid during the financial year.
Threshold Limits for Deduction
TDS under Section 194A is required only when the interest exceeds the prescribed threshold in a financial year:
- ₹40,000 for banks, cooperative banks, and post offices (₹50,000 for senior citizens).
- ₹5,000 for other entities (like companies or partnerships).
If the total interest paid is below these limits, no TDS deduction is necessary.
Payers Liable to Deduct TDS
TDS must be deducted by:
- Banks and financial institutions.
- Companies and partnership firms paying interest on loans or deposits.
- Individuals or HUFs (only if their accounts are audited under Section 44AB in the preceding year).
Exempted Entities and Cases
Certain payments are exempt from TDS under Section 194A:
- Interest paid to banking companies, LIC, UTI, and notified financial corporations.
- Interest credited to partners by partnership firms.
- Interest on savings accounts or recurring deposits below the threshold limit.
TDS Rate and Calculation on Interest Income
TDS on interest must be calculated carefully to ensure accurate deduction and timely deposit. The rate depends on whether the recipient has provided a valid PAN and their residency status.
Standard Deduction Rate
The standard TDS rate under Section 194A is 10% on the total interest amount exceeding the threshold limit.
Higher Rate for Non-Furnishing of PAN
If the payee does not provide a valid PAN, TDS must be deducted at a higher rate of 20%, as per Section 206AA .
Example Calculation of TDS
Example:
A bank pays ₹75,000 as interest to a customer below 60 years of age.
- Threshold: ₹40,000
- Taxable portion: ₹75,000 – ₹40,000 = ₹35,000
- TDS @10% = ₹3,500
Hence, ₹3,500 will be deducted, and ₹71,500 will be paid to the customer.
Payment Workflow and Reporting Under Section 194A
Once TDS is deducted, it must be deposited with the government and reported properly. Non-compliance with due dates or incorrect filings may attract interest and penalties.
Time of Deduction of TDS
TDS on interest must be deducted at the earlier of the following events:
- When the interest is credited to the recipient’s account (including suspense accounts).
- When the interest is actually paid by cash, cheque, or any other mode.
Due Dates for Deposit
TDS deducted must be deposited to the government by:
- 7th of the next month for all months except March.
- 30th April for deductions made in March.
Payment is made using Challan ITNS 281 through banks or online portals.
TDS Returns and Certificates (Form 26Q & Form 16A)
- TDS Returns: Must be filed quarterly using Form 26Q .
- Due Dates:
- Q1 (Apr–Jun): 31 July
- Q2 (Jul–Sep): 31 October
- Q3 (Oct–Dec): 31 January
- Q4 (Jan–Mar): 31 May
TDS Certificates: The payer must issue Form 16A to the payee within 15 days of filing Form 26Q, confirming tax deduction details.
Exemptions, Lower/NIL TDS Deductions
Certain individuals and institutions can avoid or reduce TDS on interest payments by submitting prescribed forms or obtaining certificates from the Assessing Officer.
Submission of Form 15G/15H
- Form 15G: For individuals below 60 years of age declaring that their total income is below the taxable limit.
- Form 15H: For senior citizens making similar declarations.
Once these forms are submitted, the payer need not deduct TDS on interest income.
Interest Income Exemptions
Interest earned on the following is fully exempt from TDS:
- Savings bank interest under Section 10(15)(i).
- Interest on certain notified tax-free bonds or NRE deposits.
- Interest earned by entities like LIC, UTI, and banks on specified instruments.
Lower TDS Certificates from Assessing Officer
Taxpayers expecting lower income can apply for a certificate under Section 197 from the Assessing Officer to authorize deduction at a lower rate or no deduction. This certificate must be presented to the payer before payment.
Common Mistakes in Reporting TDS on Interest
Even minor errors in TDS compliance can lead to penalties or mismatches in Form 26AS. Awareness of common mistakes helps prevent compliance issues.
Late Deposit of TDS
Failure to deposit TDS on time attracts interest under Section 201(1A):
- 1% per month for delay in deduction.
- 1.5% per month for delay in payment after deduction.
Incorrect PAN Details
If the deductor quotes an incorrect PAN, the payee may face difficulty claiming TDS credit. Additionally, TDS must be deducted at 20% if the PAN is invalid or missing.
Errors in TDS Return Filing
Frequent mistakes include:
- Wrong challan numbers or TAN.
- Incorrect interest amount or date of payment.
Non-reconciliation of entries with
Form 26AS
.
Using professional accounting or TDS management software helps eliminate such errors.
Conclusion
Section 194A TDS plays an essential role in ensuring transparency in the taxation of interest income. By deducting tax at the source, the government minimizes tax evasion and ensures proper credit to recipients.
For payers, accurate tds calculation on interest, timely deposit, and correct reporting are vital to avoid penalties. For recipients, ensuring PAN accuracy and monitoring Form 26AS helps in smooth credit of TDS. Implementing automated systems or accounting software can simplify these processes for both businesses and individuals.
Jagdish Prasad is a Chartered Accountant with over 5 years of experience. He helps people and businesses with GST, income tax, and HSN codes. Jagdish makes sure his clients follow all tax rules and save money the right way. He also enjoys writing simple articles to help others understand taxes and stay updated with the latest rules.
Frequently Asked Questions
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What is Section 194A TDS on interest payments?
Section 194A mandates deduction of TDS on interest (other than securities) paid by banks, companies, or other entities when it exceeds the specified threshold.
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What is the threshold limit for TDS on interest income?
₹40,000 for banks and ₹50,000 for senior citizens; ₹5,000 for other entities.
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At what rate is TDS deducted on interest payments?
The standard rate is 10%, and 20% if the payee does not provide a valid PAN.
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Can TDS on interest be avoided using Form 15G or 15H?
Yes, individuals and senior citizens can submit Form 15G or Form 15H to declare that their income is below the taxable limit, thereby avoiding TDS deduction.
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How should TDS on interest be reported in income tax returns?
The deducted TDS must be reported in Form 26Q, and the recipient can verify credit in their Form 26AS while filing their income tax return.