Income Tax of India, 1961 is the governing legal act in respect of levy, collection, administration and recovery of direct taxes in India. It is in short the ultimate document when it comes to understanding income tax in India. It lays down all the rules and regulations in respect of Direct Taxes in India. Thus, the implementation of the Income Tax Act lays the responsibility of paying the tax on the individual or corporate earning income in India.
Tax Deduction at Source was introduced to collect the tax at the very initiation/generation of Income.
Income tax is payable on total income earned during the Previous year [Previous Year (PY) is a period of 12months beginning April 1 and ending on March 31, immediately preceding the Assessment Year].The Income Tax return (ITR) has to be filed in the Assessment Year [Assessment Year (AY) is defined as the year is which the Income tax return is filed for income earned during the PY].
As most tax assesses would calculate their income at the time of filing the return and would make tax payments only at the time of filing of return, there was a time lag between receipt of Income and payment of tax. It was to mitigate this time lag that the Income Tax Act introduced the Tax Deduction at Source (TDS).
Income tax Act, has laid the responsibility of deduction of tax (At various rates prescribed under section 192, 193 and 194 of the Income Tax Act) by the person making the payment of income. As the names suggest, tax is deducted at source and is deposited with the Income Tax Department.
Further, as the tax is deducted in respect of payments made under various heads, it necessitates the assessee to file a return to claim refund of the tax deducted at source. This results in improved compliance of the Income Tax Act.
Tax of the assesse is thus paid through the PY (previous year) during which it is earned. Like in case of salaried employees, tax is deducted under Section 192 of the Income Tax Act based on exemption details provided by the employee and this is spread throughout the year.
As mentioned earlier, Section 192 through 194 provide for clauses under which tax is to be deducted at source at a predetermined rate. Some of key features of these sections are noted below:
|Section||Source of Income||Amount on which tax is deducted at source||Rate of Tax|
|192||Payment of Salary and Wages||TDS is deducted based on estimated income of the individual for the PY after deducting exemption under Chapter VI of the Income Tax Act. Also No TDS is deductible if the estimated income is below the minimum taxable income||As applicable on individual income basis||Not Applicable|
|193||Interest on Debentures||Amount exceeding Rs.5,000/-||10%||10%|
|194C (1)||Payment to Contractors||Single payment exceeding Rs. 35,000 and aggregate payment exceeding Rs. 75,000||1%||2%|
|194 J||Professional / technical services, royalty||Amount exceeding Rs.30,000||10%||10%|
|194A||Interest other than on securities by banks||Amount exceeding Rs.10,000||10%||10%|
|194A||Interest other than on securities by others||Amount exceeding Rs.5,000||10%||10%|
The above table shows some of the clauses under which TDS is deducted. Note that the clauses for deduction of tax at source provide for the following:
- Nature of payment which is subject to TDS
- Clause under which TDS is deducted
- The Rate at which TDS is deducted. As seen above TDS is deducted @10% on payment of interest or payment of professional fees but the same is deducted @1% on payment to contractors.
- It also specifies that TDS has to be deducted only if the payment is above the threshold as mentioned in the ACT. That is, while TDS on salary is deducted only if it exceeds the ‘minimum taxable income’ which is Rs. 2.50 lakhs for AY2017-18 .TDS in respect of interest payment by banks has to be deducted if the amount received as payment from the bank is above Rs.10,000.
As mentioned above, Section 194A provides for deduction of tax at source in respect of ‘Interest’ other than on securities paid by banks or other entities. It implies the following:
Nature of Payment: The payment is in form of interest payment other than on securities. Thus, any payment of interest on fixed deposits or recurring deposit or interest on any loan taken by a company/firm is subject to TDS.
- Who should deduct TDS under section 194A? The clause clearly pertains to payment of interest made by banks and others being a firm or a corporate. We would refer to people liable to deduct tax as ‘deductor’.
However, Section 194A excludes individuals and HUFs. That is, if an individual is paying interest to a bank against a loan taken by him, he would not be liable to deduct TDS before making an interest payment to the bank.
However, if the individual is subject to audit under section 44AB of the Income Tax Act, then such individual is required to comply with the TDS norm and deduct tax at prescribed rate.
Applicable to which Entity? As per section 194A, deductor has to deduct TDS irrespective of whether the interest, other than on securities, is paid to individuals, HUFs, companies or firms (herein after referred to as the deductee).
However, it may be noted that 194A deals with payment of interest made to Indian residents. Payment of interest made to non-residents is covered under Section 195 of the Income Tax Act.
- When to deduct tax at source? Tax is deductible only if the total amount of interest paid/payable by the deductor in the PY is more than Rs. 5,000. However, in case of banks, co-op societies or post office this amount is increased to Rs.10,000. Thus, a bank would deduct TDS only if the interest paid/payable on its time deposit is more than Rs.10,000/- Further, Tax is deductible at the time of accrual or payment whichever is earlier.
Further, it may be noted that if the interest amount exceeds the maximum permissible amount, TDS is deducted on the entire interest amount. That is if the interest paid by a bank on a fixed deposit is Rs. 12,500, TDS would be deducted on the entire amount of Rs. 12,500/- (As it exceeds the maximum exempted limit of Rs.10, 000) and not merely on the amount by which is exceeds Rs.10, 000/-.
- Rate at which Tax is deducted at Source? The tax has to be deducted at a flat rate of 10% on the interest amount. Please note that ‘No surcharge or cess’ would be deducted.
It may be noted that in case the deductee does not furnish a Permanent Account Number (PAN), the higher rate of TDS is applicable which would be higher of the rate prescribed by the Income Tax Act or the Finance Tax or @20%.At present the same is deducted @20%.
Thus, when all the above conditions are complied with Section 194A is applicable.
As mentioned above TDS is deductible if the amount of interest paid/payable during the PY exceeds Rs. 10,000/- in cases of banks and Rs.5,000/- in case of others.
So the next time you open a fixed deposit account with a bank wherein the interest receivable is more than Rs. 10,000, don’t forget to adjust the TDS before calculating the amount you would receive in hand. Thus, on a fixed deposit of Rs. 200,000 @7.5%, the interest amount would be Rs.15,000 and TDS would be Rs. 1,500 (@10%) and the amount receivable by the depositor would be the principal Amount of Rs.2,00,000 plus interest of Rs. 13,500.
However, it is not always that simple to arrive at the TDS amount and it is important to understand some other factors while computing TDS.
Cumulative Interest: While calculating the interest payment the deductor has to consider the total amount of interest paid/payable to the deductee. That is, suppose if the interest payable till the month of June of the PY was Rs.3000 then no TDS is deducted. However, in September if the cumulative interest paid is Rs. 7,000, then the deductee (other tha bank) would have to deduct TDS on Rs. 7,000 @10% in the month of September.
Branch Neutral: While deducting TDS, the banks have to consider the total interest payments made by it to the person/entity. That is, if fixed deposits are maintained in different branches of the same bank, the bank is expected to calculate the amount of interest paid on all the deposits and deduct TDS on such cumulative interest amount.
- TDS to be deducted on Interest accrued: Where the deposit is for a period of more than one year and the interest in compounded, the deductor needs to pay TDS as and when the interest is accrued irrespective of whether the same is paid or not.
Interest is many a times the only source of income for senior citizens in India. The amount above which TDS is deductible by banks on interest payment is very low at Rs. 10,000 as compared to the interest income earned by senior citizens, which is much more above Rs. 10,000 but lower than the maximum amount exempt from payment of income tax. This may also apply to residents other than senior citizens.
For eg, If Mr. X earns income only in the form of interest income of Rs.120,000, he is not required to file income tax return. But as per section 194A, he would be subject to TDS @10%. To remove and save such assessee from such inconvenience, the Income tax Act has provided that no TDS be deducted on interest payments in the following cases:
FORM 15G/15H for non-deduction of TDS: Section 197A provides that, in case of the assesse, being a resident of India, if his annual income by way of interest does not exceed the maximum income subject to tax, he may submit a declaration to the deductor in a prescribed form.
- Declaration in respect of the same needs to be submitted in FORM 15H in case the assesse is a senior citizen and in FORM 15G in case the assesse is not a senior citizen.
- Declaration has to be submitted in duplicate, a copy of which is submitted to the Income Tax Department by the deductor.
Please note that such declaration can be made my person other than senior citizen even if the annual income by way of interest exceeds the maximum income subject to tax, but the tax payable on his total income is NIL.
The payee may also approach the Assessing Officer for non-deduction of TDS. The Assessing Officer may on scrutinizing the application decide that the payee should not be subject to tax and may be subjected to tax at a lower rate. The Assessing Officer may then issue a ‘Certificate for non-deduction of tax or Certificate for deduction of tax at a lower rate’ as he may deem fit.
- Further, any interest paid by the firm to its partners would not be subject to TDS.
The tax so deducted at source by the deductor has to be deposited to the Income tax Department of the Central Government.
The deductor is required to pay the TDS amount on or before the 7th day of the preceding month. That is, the tax deducted in the month of April, needs to be deposited on or before May 7. This provision is relaxed for the month of March, which is the month of making provisions and financial year end for most companies. Thus, the tax deducted at source in the month of March can be deposited by April 30th instead of April 7th.
- Every deductor of TDS is required to obtain a TAN (Tax Deduction and Collection Account Number).
- Every deductor is required to submit a quarterly return in prescribed form mentioning the details of the deductee, the amount paid and the TDS deducted.
- Once the return is filed, FORM 16B is auto generated and the same needs to be downloaded by the deductor and furnished to the deductee on a quarterly basis.
Non-deduction of TDS as prescribed under 194A is subject to levy of interest @1% for every month or a part thereof till such date that the tax is deducted. Delay in deposit of tax deducted at source is also subject to interest @1.5% for a period from which tax is deducted to the date on which the taxable amount is deposited.