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2021

TDS on Payment of Interest – Relevant Provisions

TDS on payment

TDS is the abbreviation for Tax Deducted at Source. TDS is a direct taxation mechanism which was introduced to collect taxes from the source of income itself or at the time of income payout. Under this mechanism, a person liable to make payment to any other person is required to deduct tax at source from the total amount payable and transfer the balance to the recipient of such income. The person liable to make payment is called deductor while the recipient of the income is called the deductee. The deductor would deduct TDS at the time of crediting the amount to the account of the deductee or at the time of actual payment whichever is earlier. The TDS so deducted shall reflect in Form 26AS of the deductee for the relevant financial year. The deductee can take tax credit of such TDS amount at the time of filing of Income Tax Return.

Section 193: TDS on Interest on Securities:

Meaning of Securities:

  • A term security means a tradable financial asset. Generally speaking, any form of financial instrument is commonly referred to securities.
  • The term 'Securities' under Section 2(81) of the Companies Act, 2013 has been defined to mean 'securities' as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA).
  • Under section 2(h) of SCRA, the term ‘securities’ include the following:
    • Shares, scrips, stocks, bonds, debentures, debenture stocks etc. in or of any incorporated company or another body corporate;
    • Derivatives;
    • Units issued by any Collective Investment Scheme to the investors in such scheme;
    • Security receipt as defined in Section 2(zg) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
    • Units or any other such instruments issued to the investors under any Mutual fund scheme;
    • Government Securities;
    • Such other instruments, rights or interest therein shall be declared by the government to be securities be declared by the government to be securities.

Interest on Securities:

  • As per section 2(28B) of Income Tax Act, “Interest on Securities” means:
    • Any interest on security issued by the Central Government or State Government.
    • Interest on debentures
    • Interest on other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act.

TDS on Payment of Interest on Securities [Section 193]:

  • Section 193 deals with the TDS on interest on securities. Tax is deducted under section 193 if any person pays income by interest on securities to a resident.
  • However, if the payment of interest on securities is done to a non-resident, such payments are covered under the TDS as per section 195.
  • Any person responsible for paying any interest on securities to a resident is required to deduct tax at source.

Time of Deduction of TDS u/s 193:

  • TDS shall be deducted under this section, either at the time of credit to the account of the payee or at the time of payment thereof, whichever is earlier.
  • For this purpose, credit to “Interest Payable Account” or “Suspense Account” or any other name shall be deemed to be a credit of such income to the account of the payee.
  • For this purpose, “payment” can be in cash or by issue of a cheque or draft or by any other mode.

Rate of TDS Deduction u/s 193:

  • When PAN is furnished by the Payee:
    • TDS u/s 193 shall be deducted at the rate of 10%.
    • No surcharge, plus Health & Education Cess shall be added to the above rates. Hence, tax will be deducted at source at the basic rate.
  • When PAN is not available or not furnished by the Payee:
    • If PAN is not available or not furnished by the payee, TDS will be deducted at higher of the following rate:
    • At the rates specified in the relevant provisions of the Act; or
  • At the rate(s) in force; or
  • At the rate of 20%.

Form 13 [Section 197]:

  • The provisions contained in Section 197 of the Income Tax Act, permits taxpayers a facility of Nil or lower tax rate deduction of TDS or exemption of TDS.
  • For availing this benefit, assessees whose income would be liable for a tax deduction at source (TDS) need to furnish an application before assessing officer having jurisdiction over the assessee.
  • The assessee concerned could apply for a certificate for Nil or lower deduction of TDS on the receipts in the prescribed Form No 13 to the jurisdictional assessing officer.
  • The AO would consider the total income of the assessee and the estimated tax liability, and accordingly, grant a certificate for TDS at Nil or lower rate to such applicant.
  • Lower TDS certificate & Nil TDS certificate under section 197 can be issued under this section if conditions satisfied.
  • Similarly, Declaration can also be made by filing Form 15G/15H.

Note: If the payee does not hold a valid PAN or fails to furnish a valid PAN along with above forms, any declaration in Form 13 or Form 15G/15H would become invalid and TDS shall be deducted at the rate of 20%.

Exemption from TDS Deduction u/s 193:

No TDS shall be deducted in the following cases:

  • In case where debentures are issued by the listed companies, no TDS shall be deducted up to Rs. 5,000 (such amount up to Rs 5000 shall be given by an a/c payee cheque).
  • In case of 8% saving (taxable) bonds, for an amount up to Rs. 10,000.

Non-Applicability of Section 193 in certain cases:

As per the Income Tax Act, there exist some situations which do not require any tax deduction in this section. Let’s discuss it as follows:

  • Interest payable on debentures issued by the notified institution, authority, Public Sector Company or co-operative society.
  • Interest payable to LIC/ other insurers on securities owned by them or in which they have full beneficial interest.
  • Interest payable on security (which is in demat form) issued by a company listed on stock exchange in India.
  • Interest on 7 year National Savings Certificate (IV issue).
  • Interest on the National Development Bonds.
  • Interest on 4% National Defense Loan, 1968 or National Defense Loan, 1972 held by an Individual.
  • Interest on 4% National Defense Bonds, 1972 held by a resident Individual.
  • Interest to the GIC (General Insurance Corporation) on the securities owned by it or in which it has a full beneficial interest.
  • Interest on 6 % Gold Bonds, 1977 or 7% Gold Bonds, 1980 held by a resident Individual only if the total nominal value of the bonds didn’t exceed INR 10,000 at any time during the period to which the interest relates.
  • Interest on Security of the Central Government or a State Government.
  • Interest to any other insurer on the securities owned by it or in which it has a full beneficial interest.

Section 194A TDS on Interest other than Interest on Securities:

  • Section 194A deals with deduction of TDS on interest other than interest on securities like Interest on Fixed Deposits, Interest on Loans and Advances other than banks.
  • This Section is only applicable to a resident. Thus, the provisions of section 194A are not applicable in case of payment of interest to a non-resident.
  • Payments made to non-residents are also covered under TDS mechanism. However, tax in such a case is to be deducted as per Section 195.

Threshold Limit for TDS Deduction under Section 194A:

The payer of interest shall be liable to deduct on such interest if the total interest paid or credited or is likely to be paid or credited in a financial year exceed following amounts:

Payer (Deductor)

Recipient of Income (Deductee/Payee)

Resident Indian below 60 years of age

Resident Senior Citizen

Banking company or any bank or a banking institution

40,000

50,000*

Co-operative society engaged in the business of banking

40,000

50,000*

Post office (on deposit under scheme framed and notified by Central Government)

40,000

50,000*

Any person other than above

5,000

5,000

*Note: From FY 2018-19 onwards no TDS will be deducted on interest earned upto INR 50,000 by senior citizens. The interest amount should be earned from the following:

  • Deposits with banks;
  • Deposits with post offices
  • Fixed deposit schemes
  • Recurring deposit schemes

Non-Applicability of Section 194A:

TDS u/s 194A may not be required to be deducted in the following cases:

  • When the total amount of interest paid on deposits (or to be paid) during the whole financial year does not exceed the threshold limit prescribed under this section.
  • Interest income paid to bank company, co-operative society, financial corporation, LIC, UTI, company or cooperative society involved in the insurance business.
  • Interest income (as per 194A) paid by a partnership firm to its partner.
  • An income not exceeding Rs.50000, when actually paid by Motor Accidents Claim Tribunal during a financial year.

No Deduction / Lower Deduction of TDS:

  • Declaration u/s 197A in Form 15G/15H:

If a declaration is submitted under Section 197A by the recipient to the payer along with his/her PAN, then no tax is deductible if the following conditions are satisfied:

  • Recipient is a person other than a company OR firm.
  • Tax on total income of the previous year (PY) is NIL.
  • Total income does not exceed the exemption limit.
  • Such a declaration shall be given in duplicate Form 15G (15H for Senior Citizens). In case of Senior Citizens Saving Scheme, 2004 (SCSS), investors can submit the declaration.
  • Nominees of investors of SCSS can also produce the declaration at the time of payment after the death of the depositor.
  • On submission of declaration to the bank, bank shall not deduct tax (subject to the conditions) on payment of interest.
  • Declaration u/s 197 in Form 13:
    • As per provisions of Section 197, the recipient can apply in Form 13 to the Assessing Officer to get a certificate authorizing the payer to deduct tax at lower rate (or deduct no tax, if certain conditions are satisfied).
    • There is no time limit for application and it can be filed at any time before actual deduction of tax. If the recipient does not have PAN, he cannot apply for the certificate.
    • The certificate shall be issued, directly to the person responsible for paying income, on a plain paper, under an advice to the applicant.
    • The certificate cannot be issued with retrospective effect.
    • The recipient may furnish copy of such certificate to the person responsible for paying the income for lower/no deduction of tax at source.

Time Limit to deposit TDS:

  • TDS deducted is required to be deposited to the credit of the Government within given below timeline to avoid interest:

 

Month of Deduction

Due date of deposit of TDS

During any month from April to February

7th of Subsequent Month

During the month of March

30th April

TDS Return Filing Due Date:

Quarter

TDS Return Filing Due Date

Q1: April to June

31st July

Q2: July to September

31st October

Q3: October to December

31st January

Q4: January to March

31st May

TDS Certificate:

  • Deductor of tax shall issue a TDS certificate to the deductee in Form 16A for tax deducted at source other than salary.
  • The due dates for receipt of TDS certificates are as follows:

 

Quarter

TDS Return Filing Due Date

Q1: April to June

15th  August

Q2: July to September

15th  November

Q3: October to December

15th February

Q4: January to March

15th June

Interest on Late Filing:

Section

Nature of Default

Interest Payable

Period for which interest is to be paid

201A

Non deduction of tax at source, either in whole or in part

1% per month or part thereof

From the date on which tax deductible to the date on which tax is actually deducted.

After deduction of tax, Non-payment of tax either in whole or in part

1.5% per month or part thereof

From the date of deduction to the date of payment.

Notes:

  • The above interest should be paid before filing of TDS return. The deductor can make the payment of interest on such late payment of TDS before filing TDS returns or demand raised by TRACES.
  • The interest paid u/s 201A is not allowed as an expense under the Income Tax provisions.
  • Interest to be calculated on a monthly basis and not on the number of days i.e. part of a month is considered as a full month.

Penalty for late filing of TDS Returns:

  • Section 234E:
    • The deductor will be liable to pay by way of fees Rs.200 per day till the failure to pay TDS continues.
    • However, the penalty should not exceed the amount of TDS for which the statement was required to be filed.
  • Section 271H:
    • Also, a penalty from Rs.10,000 to Rs.1 lakh is leviable under Section 271H if a company provides incorrect information or fails to submit the returns within the specified due date.
    • This penalty will be charged in addition to the penalty under Section 234E.
    • No penalty under Section 271H will be charged in case of delay in filing the TDS/TCS return if the following conditions are satisfied:
      1. The tax deducted/collected at source is paid to the credit of the government.
      2. Late filing fees and interest (if any) is paid to the credit of the government.
      3. The TDS/TCS return is filed before the expiry of a period of one year from the due date specified in this behalf.

 

 

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