Tax Deducted at Source (TDS) is a critical mechanism under the Income Tax Act, 1961, designed to curb tax evasion by collecting taxes directly at the point of income generation. Among its provisions, Section 194A specifically addresses TDS on interest income (excluding interest on securities).
With recent updates in Budget 2025, this section has gained renewed attention, making it essential for taxpayers, financial institutions, and businesses to understand its nuances.
Budget 2025 Update: Key Changes to Threshold Limits
The Budget 2025 has introduced significant relaxations in TDS thresholds under Section 194A, effective from April 1, 2025:
| Nature of Interest | Previous Threshold | New Threshold |
|---|---|---|
| General Public | ₹40,000 | ₹50,000 |
| Senior Citizens | ₹50,000 | ₹1,00,000 |
| Non-Bank Entities (e.g., NBFCs) | ₹5,000 | ₹10,000 |
What is Section 194A?
Section 194A mandates the deduction of TDS on interest income (other than securities) when paid by specified entities. This includes:
- Interest on fixed deposits (FDs) and recurring deposits (RDs).
- Interest on loans or advances (excluding those by banks).
- Interest earned from cooperative societies or post office schemes.
Key Objective: Ensure tax compliance by collecting taxes at the source, reducing the burden on taxpayers during annual filings.
Suggested Read: TDS on Sale of Property
Who is Responsible for Deducting TDS?
The responsibility lies with the payer (deductor), which could be:
- Individuals/HUFs meeting these criteria:
- Gross business receipts > ₹1 crore (previous year).
- Professional turnover > ₹50 lakh (previous year).
- Required to get accounts audited under Section 44AB.
- Entities like companies, partnerships, LLPs, AOPs, or BOIs.
- Banks, cooperative societies offering banking services, and post offices.
Note: Individuals/HUFs not meeting turnover thresholds are exempt from deducting TDS.
When is TDS Deducted?
TDS is deducted at the earlier of these events:
- When interest is credited to the payee’s account (even if not withdrawn).
- When interest is paid via cash, cheque, draft, or other modes.
Example: A bank credits ₹60,000 as FD interest to a customer’s account in March 2025. Even if the customer doesn’t withdraw the amount, the bank must deduct 10% TDS (₹6,000) since the interest exceeds the ₹50,000 threshold.
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TDS Rates Under Section 194A
The applicable rates are:
- 10% if the recipient provides a PAN.
- 20% if PAN is not furnished.
COVID-19 Relief (Historical Context): From May 14, 2020, to March 31, 2021, the rate was temporarily reduced to 7.5% for PAN holders.
Thresholds for TDS Deduction
TDS applies only if interest income exceeds these limits in a financial year:
| Payer Category | Threshold (FY 2024-25) |
|---|---|
| Banks/Cooperative Societies/Post Offices | ₹50,000 (₹1,00,000 for seniors) |
| Non-Bank Entities (e.g., NBFCs, Individuals) | ₹10,000 |
Example: An NBFC paying ₹15,000 as loan interest to a customer must deduct 10% TDS (₹1,500) as the amount exceeds ₹10,000.
Suggested Read: TDS on Purchase of Property
Exemptions from TDS
No TDS is deducted in these cases:
- Savings Account Interest: Exempt under Section 194A (taxable under ITR but no TDS).
- Interest to Partners: Paid by partnership firms to partners.
- Interest to Banks/Insurance Companies: Paid to entities like LIC, UTI, or banks.
- Cooperative Societies: Interest paid to members or other societies.
- Income Tax Refunds: Interest received from the Income Tax Department.
Suggested Read: How to Pay TDS Online in India?
Avoiding TDS: Form 15G/15H and Form 13
Taxpayers can avoid TDS by submitting these declarations:
1. Form 15G/15H (Section 197A)
- Eligibility:
- Total annual income ≤ basic exemption limit (₹2.5 lakh/₹3 lakh/₹5 lakh).
- Senior citizens (Form 15H) can submit regardless of income.
- Conditions:
- Applicable only to resident individuals (not firms/companies).
- PAN must be provided.
2. Form 13 (Section 197)
- Allows taxpayers to request a lower/NIL TDS certificate from the Assessing Officer.
- Process:
- Submit Form 13 with income proofs.
- Certificate validity: Issued for one financial year.
- Note: PAN is mandatory for application.
TDS Deposit and Compliance Deadlines
- April–February Deductions: Deposit by the 7th of the next month.
- March Deductions: Deposit by April 30.
- Late Payments: Attract interest under Section 201(1A).
Conclusion
Section 194A plays a pivotal role in ensuring tax compliance for interest income. With the revised thresholds in Budget 2025, taxpayers now enjoy greater flexibility in managing their interest earnings. By understanding the deductors, exemptions, and procedural aspects like Form 15G/15H, individuals can optimize their tax outflows and avoid compliance pitfalls. Stay informed, plan ahead, and consult a tax advisor for personalized strategies.
Frequently Asked Questions
No. While savings interest is taxable, TDS is not deducted. Taxpayers can claim deductions up to ₹10,000 under Section 80TTA.
Only the interest component of EMIs is subject to TDS if paid to non-banking institutions (e.g., NBFCs). Nationalized banks are exempt.
The payer faces penalties under Section 271C, and the expense may be disallowed under Section 40(a)(ia).
No. TDS on interest paid to NRIs is governed by Section 195 at rates per DTAA agreements.
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