Friday, September 13, 2013

TDS :- Interest other than interest on securities [Section 194A]

This section deals with the scheme of deduction of tax at source from interest other than interest on securities. The main provisions are the following:

(1) This section applies only to interest, other than “interest on securities”, credited or paid by assessees other than individuals or Hindu undivided families not subject to tax audit under section 44AB in the immediately preceding financial year. In other words, individuals and HUFs subject to tax audit in the immediately preceding financial year, companies, firms, association of persons, local authorities and artificial juridical persons are under a legal obligation to deduct tax at source in respect of the interest other than “interest on securities” paid by them.

(2) These provisions apply only to interest paid or credited to residents. In respect of payments to non-residents, the provisions are contained under section 195.

(3) The deduction of tax must be made at the time of crediting such interest to the payee or at the time of its payment in cash or by any other mode, whichever is earlier.

(4) Where any such interest 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 the tax has to be deducted at source.

(5) The account to which such interest is credited may be called “Interest Payable account”

or “Suspense account” or by any other name.

The CBDT has, vide Circular No.3/2010 dated 2.3.2010, given a clarification regarding deduction of tax at source on payment of interest on time deposits under section 194A by banks following Core-branch Banking Solutions (CBS) software. It has been clarified that Explanation to section 194A is not meant to apply in cases of banks where credit is made to provisioning account on daily/monthly basis for the purpose of macro monitoring only by the use of CBS software. It has been further clarified that since no constructive credit to the depositor’s / payee’s account takes place while calculating interest on time deposits on daily or monthly basis in the CBS software used by banks, tax need not be deducted at source on such provisioning of interest by banks for the purposes of macro monitoring only. In such cases, tax shall be deducted at source on accrual of interest at the end of financial year or at periodic intervals as per practice of the bank or as per the depositor's / payee's requirement or on maturity or on encashment of time deposits, whichever event takes place earlier, whenever the aggregate of amounts of interest income credited or paid or likely to be credited or paid during the financial year by the banks exceeds the limits specified in section 194A.

(6) The deduction of tax at source is to be made in all cases where the amount of income by way of interest or, as the case may be, the aggregate of the amounts of interest credited or paid or likely to be credited or paid during the financial year to the account of or to the payee or any other person on his behalf is more than ` 5,000.

(7) The rate at which the deduction is to be made are given in Part II of the First Schedule to the Annual Finance Act. The rate at which tax is to be deducted is 10% both in the case of resident non-corporate assessees and domestic companies.

(8) No deduction of tax shall be made in the following cases:

(a) If the aggregate amount of interest paid or credited during the financial year does not exceed ` 5,000.
This limit is increased to ` 10,000 in respect of interest paid on –
(i) time deposits with a banking company;
(ii) time deposits with a co-operative society engaged in banking business; and
(iii) deposits with post office under notified schemes.

In all other cases, the limit would continue to be ` 5,000.

The limit will be calculated with respect to income credited or paid by a branch of a bank or a co-operative society or a public company in case of:
(i) time deposits with a bank
(ii) time deposits with a co-operative society carrying on the business of banking; and
(iii) deposits with housing finance companies, provided:

- they are public companies formed and registered in India
- their main object is to carry on the business of providing long-term finance for construction or purchase of houses in India for residential purposes.

The above ceiling will operate:
(i) on a branch of a bank;
(ii) with reference to only time deposits.

Hence, the interest on all other types of account such as savings account, recurring deposits etc., payable by a branch will have to be excluded to determine whether the interest exceeds ` 10,000 or not. However, in respect of time deposits, interest on all such time deposits maintained with a branch has to be aggregated.

(b) Interest paid or credited by a firm to any of its partners;
(c) Interest paid or credited by a co-operative society to a member there of or any other co­operative society;
(d) Interest paid or credited in respect of deposits under any scheme framed by the Central Government and notified by it in this behalf;
(e) Interest income credited or paid in respect of deposits (other than time deposits made on or after 1.7.1995) with

           (i) a bank to which the Banking Regulation Act, 1949 applies; or
          (ii) a co-operative society engaged in carrying on the business of banking.
(f) Interest credited or paid in respect of deposits with primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank.
(g) Interest income credited or paid by the Central Government under any provisions of the Income-tax Act, 1961, the Estate Duty Act, the Wealth-tax Act, 1957, the Gift-tax Act, the Companies (Profits) Surtax Act or the Interest Tax Act.
(h) Interest paid or credited to the following entities:
                (1) banking companies, or co-operative societies engaged in the business of banking, including co-operative land mortgage’ banks;
                   (2) financial corporations established under any Central, State or Provincial Act.
                   (3) the Life Insurance Corporation of India.
                   (4) companies and co-operative societies carrying on the business of insurance.
                   (5) the Unit Trust of India; and
                   (6) notified institution, association, body or class of institutions, associations or bodies.

(National Skill Development Fund has been notified by the Central Government for this purpose)

(i) income credited or paid by way of 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 ` 50,000.

(j) income paid or payable by an infrastructure capital company or infrastructure capital fund or public sector company in relation to a zero coupon bond issued on or after 1.6.2005 [Refer Chapter 1 for definitions of “infrastructure capital company” and “infrastructure capital fund” as per sections 2(26A) and 2(26B), respectively].

(9) The expression “time deposits” [for the purpose of (8)(a) above] means the deposits, excluding recurring deposits, repayable on the expiry of fixed periods.

(10) The time for making the payment of tax deducted at source would reckon from the date of credit of interest made constructively to the account of the payee.

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