Section 194A TDS on Interest payment

Interest Payment - When an individual or entity pays interest to someone, TDS has to be deducted on those interest payments if the amount exceeds a specific threshold limit. these payments apply to payments other than interest on securities. for example, interest on securities is treated differently Section 193 is used for that.

Interest includes in Section 194A

Interest on Fixed deposit
Interest on recurring deposits
Interest on loan and advances

Section 194A deals with deduction of TDS on interest on fixed deposits, interest on loan and advances.

Note - TDS is not deducted on interest on loans and advance from Banks.

Who is liable for Deducting TDS section 194A?

Person making the payment (interest payer) is responsible for deducting TDS. This person can be an individual paying interest on his personal saving (like Fixed deposit interest) or a corporate body paying interest on loans or other than interest on securities. For example, if you make a fixed deposit in a bank and you get interest on that deposit, then the bank will have to deduct TDS on your interest amount. If you have given a personal loan to your friend and he and he is getting interest on it, then you will have to deduct TDS on your friend’s interest amount.

Who is liable to deduct TDS under Section 194A?

Any person, other than an individual or a Hindu undivided family
Individual or a HUF has to deduct TDS if the gross receipts or business turnover exceeds Rs. 1 Crore (business) or Rs. 50 lakhs (profession) in the preceding year.

When to Deduct TDS on Section 194A?

TDS is deducted at the time of interest payment, or till the end of the month nearest to the payment date. For example – if you receive interest in January, then TDS will be deducted in January itself. If TDS is deducted at the close of the end of the financial year, then this deduction can be made in month of march.

Threshold Limit of Section 194A

Under Section 194A, if the interest payment to an individual or HUF (Hindu Undivided Family) is more than Rs. 40,000 in a financial year, then TDS is applicable. For senior citizens (age more than 60 years), this limit is Rs. 50,000. If the interest amount is less than this limit, then TDS is not deducted.

For example. If individual gets interest of Rs. 35,000 in a financial year, then TDS is not applicable on it. If a senior citizen gets interest of Rs. 55,000 then TDS is applicable on him, as this limit is more than Rs. 50,000.

TDS Threshold Limit (as of FY 2024–25):

Payer	TDS applies if interest exceeds	Notes
Bank / Cooperative Society / Post Office	₹40,000 (₹50,000 for senior citizens)	Per bank, per PAN
Others (e.g., companies)	₹50,000	Per payee, per year

Rate of TDS on Section 194A

Normal rate of TDS section 194A is 10%, if PAN (Permanent account number) of payee is not available, then TDS rate can be 20%. For example – if you are getting interest of Rs. 60,000 and your PAN is available, then TDS 10% i.e., Rs. 6,000 will be deducted and you will get Rs. 54,000. If PAN is unavailable, then TDS rate will become 20% and you will get Rs. 48,000 (Rs. 60,000 – Rs.12,000).

If Payee is non-resident, then tax and rules may be slightly different i.e., Non resident person deducted TDS Under Section 195.

TDS Certificate (Form 16A)

If TDS has been deducted, the payee gets a certificate in Form 16A, which indicates that TDS has been deducted for that person and the amount has been paid to the government.

Calculation of TDS under Section 194A

TDS calculation is done like this

Interest amount (which you are getting)
Check threshold limit (Rs. 40,000 or Rs. 50,000)
Rate of TDS (normally 10%)
TDS Amount (Interest amount X TDS rate)

Example – Assume that Mr. Sharma is getting interest of Rs. 45,000 on his bank FD and his Pan number has been given to the bank

Interest amount – Rs. 45,000
TDS rate – 10%
TDS deducted = Rs. 45,000 * 10 % = Rs. 4,500
Amount received = Rs. 45,000 – Rs. 4,500 = Rs. 40,500.

In case Mr. Sharma unable to furnish PAN the scenario will be changed

Interest amount – Rs. 45,000
TDS rate – 20%
TDS deducted = Rs. 45,000 * 20 % = Rs. 9,000
Amount received = Rs. 45,000 – Rs. 9,000 = Rs. 36,000

What are the exemptions from TDS?

Interest on Saving account
Interest on income tax refund
Interest paid by partnership firms to partners
Interest paid to recognised entities (Banks, LIC or Insurance companies
Interest paid by co-operative societies with the gross receipts upto 50 crores to its member
Interest paid by primary agricultural credit society on deposits made with them
Interest on Zero Coupon Bonds
Interest on FD deposits in the name "Registrar General of India"
Interest on National Saving Certificate (NSC), Housing and urban development corporation (HUDCO), Kisan Vikas Patra (KVP), post monthly schemes, post office recurring deposit schemes and notified schemes of government

Filing of TDS returns

Whatever TDS is deducted it has to be filed on the government portal through TDS return while filing TDS returns, details have to be submitted such as

TDS deducted amount
Payee details (Name, PAN etc.)
Tax Challan details
BSR Code
Tender Date means Tax deposit date

Penalties for Non-Compliance

If there is any default in TDS deduction, like not deducting TDS on time or providing incorrect information, then the income tax authorities can impose a penalty on you. Therefore, timely deduction and fining of TDS is important.

Accounting Entries of Section 194A (both Deductor & Deductee)

Example – ABC Ltd made a fixed deposit (FD) of 50 Lakhs on PNB Bank, and bank pay interest on FD of 90,000 in F.Y 24-25

Journal Entries in Books of Deductor – PNB Bank

Interest (expense) A/c Dr.	90,000
To ABC (Current liabilities) Ltd		90,000
(Being interest due)

ABC Ltd Dr.	9,000
To TDS Payable – 194A (Current liabilities)		9,000
(Being TDS deducted on 90000@10%)

ABC Ltd Dr.	81,000
To Bank A/c		81,000
(Being Interest transfer to ABC ltd)

TDS Payable – 194A Dr.	9,000
To Bank A/c		9,000
(Being TDS deposited to Govt. Portal)

Journal Entries in Books of ABC Ltd (Deductee)

PNB FD A/c Dr.	90,000
To FD Interest (Income)		90,000
(Being Interest Accrued)

TDS Receivable – 194A	9,000
To PNB FD A/c		9,000
(Being TDS Deducted by PNB against FD)

Bank A/c Dr.	81,000
To PNB FD A/c		81,000
(Being Interest Received from PNB bank Against FD)

Conclusion

The objective of Section 194A is to regulate TDS on interest income. TDS is deducted on interest payments if the total interest amount exceeds the threshold limit. Normal rate of TDS is 10%, but in case of PAN absence it can be as high as 20%. The responsibility of deducting TDS lies with the payer and a TDS certificate (Form 16A) is issued thereafter. So, if you are paying interest to someone, it is important that you understand the provisions of section 194A and deduct TDS accordingly.

FAQ'S

Who deducts TDS?

Any person (except Individual/HUF not liable to audit) who pays interest (other than interest on securities) to a resident must deduct TDS under this section.

TDS Section 194A applicable on?

Applicable on:

Interest from bank deposits (FD/RD)
Interest from NBFCs
Interest paid by companies, firms on loans
Interest on post office deposits (if applicable)

Fintaxman

Section 194A TDS on Interest payment – Other than Interest on Securities