Section 194A – In order to collect tax easily and effectively, the Income-Tax Legislation has introduced a tax-deductible scheme at the point of income generation. This system is referred to as “Tax Deducted at Source” normally recognized as TDS. In this scheme, the tax is withheld at the point of origin of the profits. The tax is deducted by the payer and is given back straightforwardly to the Government by the payer on the consent of the payee.
Section 194A concerns with laws relating to TDS on interest rather than shares. Taxes have to be withheld u/s 194A if interest (apart from interest on securities) is charged to an Indian citizen. Therefore, the terms of section 194A shall not extend to the payment of interest to a non-resident. Payments rendered to non-residents are often protected by the TDS scheme, but in such a situation the tax is to be withheld in compliance with section 195.
Let’s take an example to have a better understanding
Example 1 –
ABC, a partnership company, borrowed ₹8.40,000 from an individual residing in India. Loan interest for the FY 2020-21 is ₹84,000. Would this company subtract tax at source from the interest?
Tax on interest would be to be subtracted u/s 194A. (other than interest on securities). Taxes have to be subtracted if the interest is paid to an Indian resident. In this scenario, the company paid interest (other than interest on securities) to a citizen and, therefore, the company will have to subtract tax u/s 194A from interest paid of ₹84,000.
Example 2 –
ABC, a partnership firm, borrowed ₹8.40,000 as a loan from a non-Indian resident. Loan interest for the FY 20-20-21 of ₹84,000. Will the company subtract tax at source from the interest?
Tax on the interest is now to be subtracted u/s 194A. Taxes have to be withheld if the interest is paid to a citizen. In this scenario, the company paid interest (apart from interest on securities) to a non-resident and, thus, the company is not entitled to deduct tax at source u/s 194A. That being said, section 195 demands that the tax at source be excluded from the payment rendered to a non-resident. The corporation is not allowed to deduct tax at source as per section 194A but is authorized to subtract tax at source as per section 195.
Who’ll have to deduct tax at source?
Every payer other than a citizen or a Hindu undivided family (HUF) who’s really liable for paying interest (apart from securities) to a resident is liable to subtract tax at source u/s 194A. That being said, a person or a HUF whose cumulative revenue, gross receipts or turnover of a company or profession conducted on by him or her crosses ₹1crore in that situation of a business and ₹50 in the situation of a profession during the FY immediately preceding the FY in which the above sum is credited or paid, is allowed to deduct tax u/s 194A.
When does TDS under section 194A should be deducted?
The payer must subtract TDS if the sum of all such interest charged or credited is expected to be paid or credited in the course of the FY reaches Rs. 40,000 where the payer is –
- Financial institution.
- Co-operative corporation involved in the banking business.
- Postal Office.
- In any other scenario ₹5,000.
- From 2018 to 19, no TDS would be subtracted from interest earned up to ₹50,000 by elderly people. The amount of interest can be received from the following.
- Bank deposits;
- Deposits with the Postal Service
- FD schemes
- Recurring deposit schemes
This article is just the summary of section 194a. If you want to know to full details in downloadable version – Section 194A