For quick and efficient collection of taxes, the Income-tax Law has incorporated a system of deduction of tax at the point of generation of income. This system is called “Tax Deducted at Source” commonly known as TDS. Under this system, tax is deducted at the point of origination of income. Tax is deducted by the payer and the same is directly remitted to the Government by the payer on behalf of the payee.
Introduction
The provisions of tax deducted at source presently apply to several payments like salary, interest, commission, brokerage, professional fees, royalty, etc. In this part, you can gain knowledge on three major payments covered under the TDS mechanism viz. (1) TDS on interest other than interest on securities; (2) TDS on interest on securities and (3) TDS on fees for professional/technical services/royalty.
Tax deducted at source from interest other than interest on securities (Section-194A)
Section 194A deals with the provisions relating to TDS on interest other than on securities. Tax is to be deducted under section 194A, if interest (other than interest on securities) is paid 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.
Who must deduct tax at source?
Every person (i.e. the payer) other than an individual or a Hindu undivided family (HUF), who is responsible to pay interest (interest other than on securities) to a resident, is liable to deduct tax at source under section 194A.
However, an individual or a HUF, whose total sales, gross receipts or turnover from the business or profession carried on by him/it exceeds the monetary limits specified under section 44AB during the financial year immediately preceding the financial year in which the aforesaid amount is credited or paid, shall be liable to deduct tax under section 1 94A. In other words, an individual or a HUF is liable to deduct TDS under section 1 94A, if such individual or HUF was liable to get his/its accounts audited under section 44AB in the preceding financial year.
When tax is to be deducted?
As per section 194A, tax is to be deducted at the time of payment or credit of interest (to any account by whatever name called), whichever is earlier.
In case of interest on compensation awarded by Motor Accident Claims Tribunal, tax is to be deducted at the time of payment (TDS applies only if interest exceeds Rs. 50,000).
When no tax is to be deducted?
Following are few important instances in which there is no requirement of deduction of tax at source under section 194A.
1. No tax is to be deducted if the aggregate amount of interest during the financial year does not exceed Rs. 5,000.
However, the limit of Rs. 5,000 will increase to Rs. 10,000 in case of interest paid/payable by banking company on time deposit or a co-operative society carrying on banking business on time deposit and in case of interest paid/payable by post office on deposit made under Senior Citizens Saving Scheme Rules, 2004. The limit of Rs. 5,000 will be increased to Rs. 50,000 in case of Interest on compensation awarded by Motor Accident Claims Tribunal.
For the above purposes “time deposits” means deposits including recurring deposits repayable on the expiry of fixed periods.
It should be noted that interest on time deposits/deposits with a public company eligible for deduction under section 36(1 )(viii) shall be computed with reference to the income credited or paid by the banking company or the co-operative society or the public company, as the case may be, where such entity has adopted core banking solutions.
2. No deduction of tax shall be made under this section in the case of an individual, who is resident in India, if such individual furnishes to the payer, a declaration in writing in Form 15G/15H, as the case may be, to the effect that his income is below exemption limit. The provisions in this regard are as follows:
- Declaration (in duplicate) is to be made in Form No. 15H when the recipient is a senior citizen and in Form No. 15G when the recipient is other than senior citizen.
- Declaration in Form No. 15G/15H can be made only by an individual resident in India.
- Declaration in Form No. 15G/15H can be made, if the annual interest does not exceed the exemption limit (i.e. Rs.2,50,000 or Rs. 3,00,000 or Rs. 5,00,000, as the case may be). However, this condition is not applicable in case of a senior citizen (i.e. resident individual of at least 60 years of age) i.e. a resident senior citizen can furnish declaration in form 15H even if annual interest likely to be paid to him exceeds the exemption limit of Rs. 2,50,000 or Rs. 5,00,000, as the case may be, provided the tax payable on his total income is
- The tax payable on total income of the year should be “Nil”.
The payer who receives such a declaration in Form No. 15G/15H, has to deliver one copy of such declaration to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner , within 7 days of the month next following the month in which such declaration is received by him.
3. When the payee has obtained a certificate from the Assessing Officer for no deduction or lower deduction of tax.
The payee may approach the Assessing Officer by making an application in Form No. 13 for issuance of certificate for no deduction of tax or lower deduction of tax at source.
On receiving such an application, the AO may issue appropriate certificate in this regard if he is satisfied that the total income of the payee justifies the deduction of income-tax at any lower rate or nil deduction of income tax.
As per Income-tax (Ninth Amendment) Rules, 2014, Certificate for non-deduction of income-tax shall be issued directly to the person responsible for deducting the tax under an advice to the payee (i.e. who made an application for issue of such certificate).Whereas, certificate of lower deduction of income-tax shall be issued to payee itself.
If AO has issued certificate for no deduction of tax or lower deduction of tax, as the case may be, then payer should deduct tax accordingly.
4. No tax is to be deducted under section 194A in respect of interest credited or paid by the firm to its partners.
5. Apart from above discussed instances, few other instances where no tax is to be deducted are as follows:
- Interest paid to any banking company to which the Banking Regulation Act, 1949, applies, or any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank).
- Interest paid to any financial corporation established by or under a Central, State or Provincial Act.
- Interest paid to the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956.
- Interest paid to the Unit Trust of India established under the Unit Trust of India Act, 1963.
- Interest paid to any company or co-operative society carrying on the business of insurance.
- Interest paid to any other institution, association or body or class of institutions, associations or bodies which the Central Government may notify.
- Interest paid by a co-operative society (other than a co-operative bank) to a member thereof or to such income credited or paid by a co-operative society to any other co-operative society.
- Interest credited or paid in respect of deposits notified by the Central Interest credited or paid in respect of deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank.
- Interest credited or paid by the Central Government under any provision of Income-tax Act, 1961 or Wealth-tax Act, 1957.
- Interest which is paid or payable by an infrastructure capital company or infrastructure capital fund or a public sector company or scheduled bank in relation to a zero coupon bond issued on or after the 1st day of June, 2005
- Interest paid by special purpose vehicle to business trust as given in section 10(23FC) [from 1-10-2014].
Rate of TDS
As per section 1 94A read with Part II of First Schedule to Finance Act, tax is to be deducted @ 10% from the amount of interest. However, if the payee does not furnish his Permanent Account Number (PAN), then the payer has to deduct tax at the higher of following:
- At the rate specified in the relevant provision of the Income-tax Act.
- At the rate or rates in force, i.e., the rate prescribed in the Finance Act.
- At the rate of 20%.
Payment of tax to the credit of the Central Government
Tax deducted from interest by the non-Government deductor is to be paid to the credit of the Central Government by the following due dates:
- Tax deducted during the month of April to February should be paid to the credit of the Government on or before 7 days from the end of the month in which the tax is deducted.
- Tax deducted during the month of March should be paid to the credit of the Government on or before 30th day of April.
Interest for delay in payment of TDS
As per section 201, if any person who is liable to deduct tax at source does not deduct tax at source, or after so deducting fails to pay the whole or any part of the tax to the credit of the Government, then such person shall be liable to pay simple interest at following rates:
- Interest shall be levied @ 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such
tax is deducted. Interest shall be levied @ 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid to the credit of the Government.
In other words, interest will be levied @ 1% for delay in deduction and @ 1.5% for delay in payment after deduction.
Issuance of TDS certificate
Every deductor has to furnish a TDS certificate to the deductee in Form No. 1 6A (for tax deducted on payments other than salary). The certificate should be issued on quarterly basis by following dates:
| Quarter | Due date for Non-Government deductor |
| April to June | 30th July |
| July to September | 30th October |
| October to December | 30th January |
| January to March | 30th May |
The certificate should be downloaded from http://contents.tdscpc.gov.in
Furnishing the TDS return
Every deductor who has deducted tax at source has to furnish the details of tax deducted by him to the Government. These details are to be furnished to the Government in the prescribed form. These details are to be furnished on quarterly basis. In other words, every deductor has to furnish the details of tax deducted by him by filing quarterly TDS return in the prescribed form. The due dates for filing the quarterly TDS return by a non-Government deductor are as per table given below :
| Quarter | Due date of filing of TDS return |
| April to June | 15th July |
| July to September | 15th October |
| October to December | 15th January |
| January to March | 15th May |
Default in any prescribed procedure
The deductor will be liable to penalty/persecution in respect of following defaults:
- Default in obtaining Tax Deduction Account Number (*)
- Default in deduction of tax
- Default in payment of tax to the credit of the Government
- Default in furnishing the TDS return
- Default in furnishing the TDS certificate to the payee
(*) As per section 203A(1), every person liable to deduct tax at source has to obtain Tax Deduction Account Number (TAN), except person liable to deduct tax under section 1 94IA i.e. TDS on purchase of land/building and such person, as may be notified by the Central Government in this behalf.
Disallowance of expenses while computing business income due to non-deduction of tax at source under section 194A
As per section 40(a)(ia), any sum payable to a resident, which is subject to deduction of tax at source, would attract 30% disallowance while computing income chargeable to tax under the head “Profits and gains of business or profession”:
- If tax is deductible at source but is not deducted.
- If tax is deducted during the year, and the same is not paid on or before the due date of filing of return of income specified under section 139(1).
In other words, if tax is deducted during the year and the same is paid on or before the due date of filing the return as specified in section 139(1), then the concerned expenditure will be deductible in the year in which such expenditure is incurred.
However, any payment disallowed by aforesaid provision, shall be allowed as a deduction in computing the income of the year in which such tax deducted has been paid to the Government.
Tax deducted at source from fees for professional services/technical services/Royalty (Section-194J)
As per section 194J, tax is to be deducted in respect of the following payments to a resident:
a) Fees for professional services, or
b) Fees for technical services, or
c) Director’s fees (not in the nature of salary), or
d) Royalty, or
e) Any sum referred to in clause (va) of section 28 [i.e. non-compete fee].
The provisions of section 194J are not applicable in case of payment of fees, royalty, etc. 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.
Tax to be deducted by whom?
Every person (i.e. payer) other than an individual or a Hindu undivided family (HUF), who is responsible to make payments covered under section 194J to a resident, is liable to deduct tax at source under section 194J.
An individual or a HUF, whose total sales, gross receipts or turnover from the business or profession carried on by him/it exceeds the monetary limits specified under section 44AB during the financial year immediately preceding the financial year in which aforesaid amount is credited or paid, shall be liable to deduct tax under this section. In other words, an individual or a HUF is liable to deduct TDS under this section, if such individual or HUF was liable to get accounts audited under section 44AB in the preceding financial year.
When tax shall be deducted?
As per section 194J, tax is to be deducted at the time of payment or credit (to any account by whatever name called), whichever is earlier.
When no tax shall be deducted?
Following are few important instances in which there is no requirement of deduction of tax at source under section 194J.
1. No tax is to be deducted if the amount of professional fees or technical fees or royalty or non-compete fee during the financial year does not exceed Rs. 30,000. However, there is no such limit in case of director’s fees.
2. No tax to be deducted from fees paid by an individual/a HUF for the professional service received by him/it for personal purposes.
No tax is to be deducted by a payer being an individual or a HUF in respect of fees for professional service, if such fees are paid for any personal service of such individual or any member of the HUF.
3. When the payee has obtained a certificate from the Assessing Officer for non – deduction or lower deduction of tax.
The payee may approach the Assessing Officer by making an application in Form No. 13 for issuance of certificate for non-deduction of tax at source or lower deduction of tax.
On receiving such an application, the AO may issue appropriate certificate in this regard if he is satisfied that the total income of the payee justifies the deduction of income-tax at any lower rate or nil deduction of income tax.
As per Income-tax (Ninth Amendment) Rules, 2014, Certificate for non-deduction of income-tax shall be issued directly to the person responsible for deducting the tax under an advice to the payee (i.e. who made an application for issue of such certificate).Whereas, certificate of lower deduction of income-tax shall be issued to payee itself.
If AO has issued certificate for no deduction of tax or lower deduction of tax, as the case may be, then payer should deduct tax accordingly.
Rate of TDS
As per section 194J, tax is to be deducted @ 10% from the payments covered under section 194J. However, if the payee does not furnish his Permanent Account Number (PAN) then the payer has to deduct tax at the higher of following:
- At the rate specified in the relevant provision of the Income-tax Act.
- At the rate or rates in force, i.e., the rate prescribed in the Finance Act.
- At the rate of 20%.
Payment of tax to the credit of the Government
The time limit for payment of tax to the credit of Government in respect of tax deducted at source under section 1 94J is same as discussed in case of section 194A.
Interest for delay in payment of TDS
Provisions relating to interest for delay in payment of TDS in respect of tax deducted at source under section 1 94J are same as discussed in case of section 194A.
Issuance of TDS certificate
The provisions relating to issuance of TDS certificate in respect of tax deducted at source under section 1 94J are same as discussed in case of section 194A.
Furnishing the TDS return
The provisions relating to furnishing of TDS return in case of tax deducted at source under section 1 94J are same as discussed in case of section 194A.
Default in any prescribed procedure
The provisions relating to various defaults are same as discussed in case of section 1 94A.
Disallowance of expenses while computing business income due to non-deduction of tax at source under section 194J
The provisions relating to disallowance are same as discussed in case of section 1 94A. Tax deducted at source from interest on securities(section 193)
Section 193 deals with the provisions relating to TDS on interest on securities. Tax is to be deducted under section 193 if any person pays any income by way of interest on securities to a resident. Thus, the provisions of section 193 are not applicable in case of payment of interest on securities 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.
Who shall deduct tax at source?
Every person who is responsible to pay interest on securities to a resident, is liable to deduct tax at source under section 193.
When tax shall be deducted?
As per section 193, tax is to be deducted at the time of payment or credit of interest (to any account by whatever name called), whichever is earlier.
When no tax shall be deducted?
In the following cases tax is not to be deducted under section 193 :
1. Any interest payable on 4.25 per cent National Defence Bonds, 1972, where the bonds are held by a resident individual.
2. Any interest payable to an individual on 4.25 per cent National Defence Loan, 1968, or 4.75 per cent National Defence Loan, 1972.
3. Any interest payable on National Development Bonds.
4. Any interest payable on 7-year National Savings Certificate (IV Issue).
5. With effect from 1-7-2012, any interest payable to a resident individual or resident HUF on any debenture issued by a company in which the public are substantially interested, if the following conditions are satisfied :
- the amount of interest or, as the case may be, the aggregate amount of such interest paid or likely to be paid on such debenture by the company to such individual or HUF does not exceed Rs. 5000; and
- such interest is paid by the company by an account payee cheque.
6. Any interest payable on any security of the Central Government or State Government, other than 8 per cent Savings (Taxable) Bonds, 2003.However,no tax to be deducted from interest on 8 per cent Savings (Taxable) Bonds, 2003, if interest payable on such bonds does not exceeds Rs. 10,000 for the financial year.
7. Interest payable on certain notified debentures issued by any institution or authority, or any public sector company, or any co-operative society (including co-operative land mortgage bank or a co-operative land development bank).
8. Any interest payable to LIC/GIC/4 companies formed under General Insurance Business Act/any other insurer in respect of any securities owned by it or in which it has beneficial interest.
9. From 1-6-2008, any interest payable on any security issued by a company, where such security is in dematerialised form and is listed on a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 and the rules made thereunder.
10. Interest payable on 6.5 percent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 held by a resident individual provided total nominal value of such bonds do not exceed Rs. 10000 at any time during the period to which the interest relates.
11. No tax is to be deducted if the payee (not being a company or a firm) furnishes Form No. 15G/15H (provisions relating to form 15G/15H have already been discussed in section 194A).
12. When the payee has obtained a certificate from the Assessing Officer for no deduction or lower deduction of tax.
The payee may approach the Assessing Officer by making an application in Form No. 13 for issuance of certificate for no deduction of tax or lower deduction of tax at source.
If the payee has obtained such a certificate from the Assessing Officer, then on production of such certificate to the payer will not deduct tax or will deduct tax at lower rate (as provided in the certificate issued by the Assessing Officer).
Rate of TDS
As per section 1 93read with Part II of First Schedule of Finance Act, tax is to be deducted @ 10% from the amount of interest. However, if the payee does not furnish his Permanent Account Number (PAN), then the payer has to deduct tax at the higher of following:
- At the rate specified in the relevant provision of the Income-tax Act.
- At the rate or rates in force, i.e., the rate prescribed in the Finance Act.
- At the rate of 20%.
Payment of tax to the credit of the Government
The time limit for payment of tax to the credit of Government in respect of tax deducted at source under section 193 is same as discussed in case of section 194A.
Interest for delay in payment of TDS
Provisions relating to interest for delay in payment of TDS in respect of tax deducted at source under section 193 are same as discussed in case of section 194A.
Issuance of TDS certificate
The provisions relating to issuance of TDS certificate in respect of tax deducted at source under section 193 are same as discussed in case of section 194A.
Furnishing the TDS return
The provisions relating to furnishing of TDS return in case of tax deducted at source under section 193 are same as discussed in case of section 194A.
Default in any prescribed procedure
The provisions relating to various defaults are same as discussed in case of section 194A.
Disallowance of expenses while computing business income due to non-deduction of tax at source under section 193
The provisions relating to disallowance are same as discussed in case of section 194A.
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