TDS on Interest on Securities (Section 193): Rates, Timing, and Exemptions

Security

Before delving into the topic of Tax Deducted at Source (TDS) on interest from securities, it's essential to first understand what securities are.  Securities mean financial instruments that pay interest. They include stocks, bonds, and other investment vehicles that represent an ownership position or a creditor relationship with an entity.

Financial instruments can be of many types –

1. Government Bonds – Bonds issued by the Government
2. Corporate Bonds – Bonds issued by private companies or public companies.
3. Debenture – Interest bearing instruments issued by companies

Understanding the nature of these instruments is crucial, as it lays the groundwork for comprehending the tax implications associated with the interest earned on them. As we explore TDS on interest from securities, we will uncover the regulatory framework and its impact on investors.

 

Section 193 Interest on Security

The term "193 - Interest on securities TDS" refers to a section under the Income Tax Act of India, which deals with the Tax Deducted at Source (TDS) on interest earned from securities.

1. Every person responsible for paying to resident any income by way of interest on security shall deduct tax at source.
2. The rate of tax deductible under section 193 is 10%. 
3. Tax should be deducted at the time of credit of such income, to the account of the payee or at the time of payment thereof in cash, or by issue of cheque or draft, or any other mode, whichever is earlier.
4. Where any income by way of interest on securities is credited to "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 is deemed to be credit of such income to the account of the payee and the tax has to be deducted at source.

In simple words, when you buy a bond or debenture, the interest you get on it is called interest on securities. For example, if you have a government bond which is giving you an interest of 10,000 every year, then TDS will be deducted on the interest under Section 193. 

Concept of Tax Deducted at Source (TDS)

TDS is a system in which tax is deducted and given to the government before the tax payee pays tax on his income. Under section 193, TDS is deducted on interest on securities. Meaning, the institution or company which is giving you interest will deduct some percentage of tax from your interest amount and the remaining amount will be given to you.

Rate of TDS

Such person is vested with the responsibility to deduct income-tax at the rates in force from the amount of interest payable.  The rate of TDS is generally 10% when the interest is more than 10,000, for example if you are getting interest of Rs. 20,000, then TDS of Rs. 2,000 (10% of Rs. 20,000) will be deducted. You will get Rs. 18,000

Who will deduct TDS?

The responsibility of deducting TDS lies on every person responsible for paying to a resident any income by way of interest payable such as-

1. Banks – if you are getting interest on corporate bonds or debentures, then the company will deduct TDS.
2. Companies – if you are getting interest on corporate bonds or debentures, then the company will deduct TDS.
3. Financial Institutions – if you are getting from any financial institution, then it will also deduct TDS.
4. Government – if you are getting interest on government securities, then the government can also deduct TDS.

Time of tax deduction at source

Tax should be deducted at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.

Where any income by way of interest on securities is credited to any account in the books of account of the person liable to pay such income, such crediting is deemed to be credit of such income to the account of the payee and tax has to be deducted at source. The account to which such interest is credited may be called “Interest Payable account” or “Suspense account” or by any other name.

Exemption Under Section 193

1. If individual and HUF are getting interest less than Rs. 10,000 then TDS is not deducted. That is, if you are getting interest less than Rs. 10,000 in a year, then TDS is not levied.
2. If you are getting interest from government securities and you are a resident, then TDS is not levied there, but if you are a non-resident, then TDS can be levied.

TDS shall not be deducted on the following conditions –

1. on 4.25% National Defence Bond 1972, where the bond is held by an individual not being a non-resident
2. On 4.45% National Defence Loan 1968, or 4.75% in National Defence Loan, 1972 where the interest is payable to an individual.
3. On National Development bonds.
4. On 7-year National Saving Certificates.
5. On Debenture issued by any institution or authority or any public sector company or any cooperative society, including a cooperative mortgage bank or cooperative land development bank, as notified by Central Government.
6. No tax is required to be deducted at source on interest payable on "Power Finance Corporation Ltd 54 EC Capital Gain Bond" issued by "Power Finance Corporation Ltd" and "Indian Railway Finance Corporation Ltd 54 EC Capital Gain Bond" issued by "Indian Railway Finance Corporation Ltd"
7. The benefit of this exemption would, however, be admissible in case of transfer of such bonds by endorsement or delivery only if the transferee informs PFCL/RFCL by registered post within a period of sixty days of such transfer.
8. On 6.5 Gold bond, 1977 or 7% Gold Bonds 1980, where the bond is held by an individual (other than a non-resident), provided that the holder of the bond makes a written declaration that total nominal value of the bond held by him, or on his behalf, did not in either case exceed 10,000 at any time during the period to which the interest relates
9. On any security of the Central government or State Government, exception 8% saving on taxable bond, 2003 or 7.75% saving (taxable) Bond 2018, only if such interest payable exceeds 10,000 during the financial year.
10. On any debenture (whether listed or not on a recognized stock exchange) issued by company in which the public are substantially interested to a resident individual or HUF. However,
• The interest should be paid by the company, by an account payee cheque
• The amount of such interest or the aggregate thereof paid or likely to be paid during the financial year by the company to such resident individual or HUF should not exceed 5000.
11. On security to LIC, GIC, subsidiary of GIC, or any other insurer, provided the security are owned by them, or they have full beneficial interest in such security.
12. On any security issue by a company where such security is in dematerialised form (Demat) and is listed on a recognized stock exchange in India in accordance with the security contract (Regulation) Act, 1956 and the rules made thereunder. 

Important Note: The earlier exemption relief on interest on dematerialized securities of a listed company was withdrawn from April 1, 2023; TDS thus now applies on such instruments also. (Budget 2024-25).

For Examples –  Air India Ltd issued debentures of 10 lakhs to the person who is resident in India during FY 2025-26. It paid interest of 1,50,000.

• TDS will be deducted on 1,50,000 as a whole amount 
• TDS = 1,50,000 *10% =15,000
• Interest paid to person = 1,50,000 – 15000
• Payable amount to investor = 1,35,000

TDS Deposit & TDS Return Form and Due date

TDS deductors have to file quarterly returns through Form 26Q, TDS deposit date kindly visit my Blog - Tax Deduction at Source in India

Conclusion

In summary, Section 193 plays a pivotal role in the taxation landscape concerning interest on securities. Both payers and recipients must be well-versed in the provisions of this section to ensure compliance and optimize their tax positions. Section 193 charges a 10% TDS on residents on interest on securities received by them, with an exemption limit of ₹10,000 from FY 2025-26. The recent changes have brought additional government securities and listed debentures within the ambit of TDS. Investors are required to deduct, remit, and report TDS on time to escape penalties and receive credit for TDS in return of income.

FAQ's

Whether TDS can be paid on interest on government securities?

Yes, w.e.f. 1st October 2024, TDS of 10% is payable on all notified government securities and SDLs.

What if the payee does not give his PAN?

In this case, TDS will be deducted at a rate of 20%.

I have below-threshold interest; how do I not get TDS?

Keep your total interest on all securities under ₹10,000 in a financial year or give Form 15G/15H (if eligible) to the deductor.

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