Here we shall discuss the TDS implications relating to payment of interest other than interest on securities as per Section 194A of the Indian Income Tax Act. Interest on securities is being covered under section 193. 

Definition of “interest”: Interest is not defined in section 194A. However, Section 2(28A) defines “interest” to mean any interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised. 

Persons Liable to deduct tax at source: Any person except individual or Hindu Undivided Family (HUF). But individual and HUF are liable to deduct if their turnover , total sales or gross receipts from business or profession carried out by him exceeding Rs.1 Crore in the case of business or Rs.50 Lakh in case of profession during the financial year immediately preceding the financial year in which the sum is credited or paid. 

Payments Liable for deduction of tax at source: Payment of interest, not being interest on securities, to a resident is liable for TDS. 

Rate of TDS: 10% on the interest payable. 

Time of deduction of tax at source: TDS shall be made at the time of payment of the interest or credit to the account of the payee whichever is earlier. However, TDS once made on payment should not again be made on the same amount at the time of credit and vice versa. 

Minimum amount not liable for tax deduction: 

a.     If the interest amount is paid by a banking company to which the Banking Regulation Act, 1949 applies: No deduction is to be made on interest of Rs.40,000/- or below paid or credited during the financial year. Only time deposits are covered here. 

b.     If the interest is paid by a co-operative society engaged in banking business: No deduction is to be made on interest of Rs.40,000/- or less per financial year. Only time deposits are covered here. 

c.     Interest on deposits with Post Office: No deduction if the interest amount in the financial year is Rs.40,000/- or below. 

d.     For the above three cases, no deduction of tax if the interest amount in the financial year is Rs.50,000 or below, if the payment is made to a senior citizen. 

e.     In all other cases, if the interest amount is Rs.5,000/- or less in the financial year, there is no need to deduct income tax at source. 

No deduction in certain cases: 

a.     If the amount is paid or credited to:  

i.       A banking company to which the Banking Regulation Act 1949 applies.           

ii.      Any financial corporation established by or under any Central, State or Provincial Act.  

iii.    A co-operative society carrying on banking business.  

iv.    The Life Insurance Corporation of India.  

v.     The Unit Trust of India.  

vi.    Any company or co-operative society carrying on the business of insurance. 

vii.   Such other institutions that the Central Government may notify on this behalf.  

b.     Interest paid or credited by a partnership firm to its partners.  

c.     Interest paid by a co-operative society to its members or to another co-operative society. However, if such co-operative society has total sales, turnover or gross receipts exceeding Rs.50 Crore during the financial year immediately preceding the financial year in which the sum is credited or paid, then it is liable to deduct tax on interest credited or paid in accordance with this section. 

d.     Interest on deposits other than time deposits maintained with a banking company to which the Banking Regulation Act 1949 applies.  

e.     Interest on deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank.  

f.       Interest on deposits other than time deposits maintained with a co-operative society carrying on banking business. (Other than the societies mentioned above). However, if such co-operative society has total sales, turnover or gross receipts exceeding Rs.50 Crore during the financial year immediately preceding the financial year in which the sum is credited or paid, then it is liable to deduct tax on interest credited or paid in accordance with this section. 

g.     Interest paid or credited by the Central Government under any provision of the Indian Income Tax Act, Wealth Tax Act, etc.  

h.     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 credited or paid during the financial year does not exceed fifty thousand rupees.  

i.       Interest paid or credited by an infrastructure capital company or infrastructure capital fund or a public sector company in relation to a zero-coupon bond issued on or after the 1st day of June, 2005 by such company or fund or public sector company. 

Case Laws:  

a.     Individual’ includes ‘artificial juridical person’ - Even an artificial juridical person can be treated as an individual under section 194A, as there is nothing to restrict the applicability of the word ‘individual’ only to a natural person or a human being - ITO v. Arihant Trust [1995] 214 ITR 306 (Mad.).  

b.     Interest on land compensation is covered - Section 194A applies to interest paid/payable on compensation for acquisition of land belatedly - Tuhi Ram v. Land Acquisition Collector [1992] 105 CTR (Punj. & Har.) 378.  

c.     ‘Interest’ satisfying definition in section 2(28A) is liable for deduction of tax at source - Where the assessee, engaged in retail financial services, floated an investment scheme under which the investors were guaranteed repayment of the invested amount within 36 months and a minimum return of 1.5 per cent per month, the mere fact that the assessee had not chosen to characterise the repayments as ‘interest’ will have no effect, nor will it be out of the ambit of the definition of ‘interest’ in section 2(28A). The assessee was therefore liable to deduct tax at source on the payments made to the investors - Viswapriya Financial Services & Securities Ltd. v. CIT [2002] 258 ITR 496 (Mad.).  

d.     Cheque discounting charges: Cheque discounting charges are different from interest payments and the provisions of section 194A are not attracted: ITO Vs. Babu Sah [2003] 86 ITD 283 (Mad.).  

e.     Adjustment of excess/deficiencies is permissible only within the financial year - Sub-section (4) of section 194A permits adjustment of excess/deficiencies only within the same financial year and not at any time - Rishikesh Balkishandas v. I.D. Manchanda, ITO [1987] 167 ITR 49 (Delhi).  

f.       Trial court cannot direct not to deduct tax at source - When motor insurance compensation is paid by an insurance company with interest, section 194A will be clearly attracted, and the insurance company is bound to deduct tax at source if the amount of interest exceeds Rs. 50,000 in a year. Where the trial court directed the insurance company to pay the full interest amount without deducting tax at source, such a direction will be erroneous. It is not within the power of the executing court to direct the insurance company not to deduct tax at source and to pay the entire amount, thereby compelling the insurance company to commit an illegal act violating the statutory provisions. The direction and order of the trial court required to be set aside - New India Assurance Co. Ltd. v. Mani [2004] 270 ITR 394/[2005] 142 Taxman 523 (Mad.).  

g.     Deduction must be on gross interest and not net interest - The expression ‘interest’ can only be the gross interest, and it cannot refer to the net interest in the context of crediting the interest by the person responsible for deducting the tax. The principle of netting the interest has no application to section 194A. Even when there are two or more transactions in which interest is paid or interest is received from, it is only on the gross amount of interest credited that tax has to be deducted under this provision - CIT v. S.K. Sundararamier & Sons [1999] 240 ITR 740 (Mad.). 

Important Circulars: 

a.     Deposits in joint names - In the case of a deposit in joint names in the absence of any proof to the contrary, both the persons can be treated as payees for the purposes of deduction of tax under section 194A. 

Persons responsible for deducting the tax in the absence of any information to the contrary, may aggregate the interest on a joint account with the interest on deposit in the individual’s account who has higher interest income.                                            The certificate of deduction of tax at source under section 203 will be given to the person in whose name the interest on joint account has been aggregated.                                                                               

Credit for the payment of tax deducted at source under section 199 will be given to the person in whose name the certificate under section 203 has been issued.If any objection is taken to the deduction of tax at source in the above manner or it is contended that the joint account holders constitute a separate person and no deduction of tax at source should be made, it will be up to them to point it out to the person paying the interest by leading evidence, i.e., by filing affidavits or statements in the manner laid down in the proviso to sub-section (1) of section 194A.—Circular : No. 256 [F. No. 275/17/79-IT(B)], dated 29-5-1979.  

b.     Interest payable on behalf of Government - The provisions of section 194A are equally applicable to persons responsible for paying such interest on behalf of the Government to any person resident in India.—Circular : No. 22/68-IT(B) [F. No. 12/23/68-IT(B)], dated 28-3-1968/13-5-1968 as modified by Letter F. No. 12/23/68-IT(B), dated 7-11-1968.  

c.     Interest paid by consignors to commission agents - Tax will have to be deducted at source in accordance with section 194A from the interest paid by consignors to their commission agents even where such interest is paid under an arrangement whereby the commission agent retains for himself the interest due to him at the time of paying to the consignor the moneys due to him on account of the consignment.—Letter : F. No. 12/12/68-IT(A-II), dated 23-9-1968.  

d.     Payments to exempt educational institutions/charitable trusts - So far as an educational institution whose income is exempt from tax under section 10(22) is concerned, the provision of section 194A will not apply to it and no deduction of tax at source from interest is required to be made by the payers. As regards a charitable trust whose income is exempt under section 11, a statement in writing may be made by the institution concerned under section 194A, or the institution may apply for a certificate for deduction at a lower rate or for authorisation of non-deduction at source under section 197.—Letter: F. No. 12/113/68-IT (A-II), dated 28-10-1968.  

e.     Interest on cumulative deposits/debentures/bonds - In respect of cumulative deposits/debentures/bonds tax is required to be deducted at source every time the interest is credited in the account books of the payer and is not to be postponed till the maturity of the deposit/debenture/bond—Circular: No. 643, dated 22-1-1993.  

f.       Commercial papers/Certificates of Deposits - The difference between the issue price and the face value of the Commercial Papers and the Certificates of Deposits is to be treated as ‘discount allowed’ and not as ‘interest paid’. Hence, the provisions of the Income-tax Act relating to deduction of tax at source are not applicable in the case of transactions in these two instruments. —Circular : No. 647, dated 22-3-1993.  

g.     Reinvestment term deposits - In the case of reinvestment term deposit, tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof, whichever is earlier. If credit is given to the account of the payee or payment is made to him annually, the tax may be deducted annually. It is clarified that a credit to interest payable account or suspense account, etc., is also taken as credit to the account of the payee, even though this credit is not reflected separately in the payee’s account—Circular: No. 715, dated 8-8-1995.  

h.     Retrospective renewal of time deposits - When a time deposit is renewed retrospectively, the relevant date for deciding the applicability of section 194A would be that date of renewal. Thus, if the time deposit is renewed on or after 1-7-1995, the tax deduction at source will have to be made from interest paid or credited in respect of such a time deposit—Circular: No. 715, dated 8-8-1995.  

i.       When part of purchase instalment is paid by a hirer to the owner under a hire purchase contract, the provisions of section 194A are not attracted. – Instruction No.1425 dt. Nov. 16, 1981.