Section 194A Income Tax Act: TDS on Interest Income
Section 194A Income Tax Act: TDS on Interest Income
Section 194A provides for the deduction of tax at the source (TDS) on interest income derived from bank deposits, loans, or other non-security sources. When the interest exceeds the statutory threshold, the payer is legally required to deduct tax, which directly affects the recipient's net income. Naturally, many taxpayers question why these entries show on their Form 26AS. Understanding this rule is critical for all parties to guarantee proper reporting and regulatory compliance.
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Key Takeaways
Section 194A imposes a 10% TDS on non-security interest above certain thresholds.
PAN is required; without it, TDS increases to 20%.
Forms 15G/15H or Section 197 allow lower or nil deduction.
Timely deduction and deposit avoid penalty, interest, and expense disallowance.
What is Section 194A of the Income Tax Act?
Section 194A of the Income Tax Act addresses the deduction of tax at source (TDS) on interest income derived from sources other than securities. This clause requires residents to pay a 10% TDS rate on interest earned from loans, advances, fixed deposits, and recurring deposits. If the PAN is not provided, the TDS rate increases to 20%. Notably, 194A of income tax does not apply to interest paid to non-residents, which falls under Section 195.
For the financial year 2025–26 (applicable for Assessment Year 2026–27), TDS under Section 194A is applicable only when the interest income exceeds the prescribed limits:
₹50,000—when the payer is a bank, co-operative society, or post office
₹100,000 – for resident senior citizens receiving interest from banks or post offices
₹10,000 – in all other cases, such as interest paid by private companies or individuals
Additionally, effective from April 1, 2025, interest, salary, and commission paid by a partnership firm to its partners are no longer exempt from TDS. These payments are now covered under Section 194T, which mandates a 10% TDS deduction if the total payment exceeds ₹20,000 in a financial year.
Who is required to deduct TDS under Section 194A?
TDS under Section 194A must be deducted by the payer if the interest paid, credited, or expected to be paid in a fiscal year exceeds certain criteria. According to the 194A TDS rate, the payer must deduct TDS when the interest amount exceeds:
₹50,000 for the payer
A financial institution, bank, or a group of banks.
A cooperative that engages in banking activities.
A post office (for deposits made through Central Government-sponsored schemes).
₹10,000 for all other cases.
The maximum for resident older citizens has been increased to ₹1,00,000 (from ₹50,000) for interest received on the following:
Bank deposits.
Deposits in post offices.
Fixed-rate deposit plans.
Recurring deposit plans.
Fundamental Provisions of Section 194A
Here are the main provisions of Section 194A:
Aside from Hindu Undivided Families (HUF) and individuals, entities that pay interest to residents must deduct TDS.
If HUFs or individuals are compelled to have their accounts audited under Section 44AB, they must deduct TDS on interest payments.
Section 194A of the Income Tax Act does not apply to interest payments paid to non-resident Indians (NRIs). Section 195 covers TDS deductions for NRIs.
Individuals or HUFs must deduct TDS if their gross receipts or business turnover exceed ₹1 crore (for business, ₹10 crore in case 95% of receipts are digital) or ₹50 lakh (for profession) in the preceding year.
When is TDS deducted under Section 194A?
TDS under Section 194A of Income Tax is deducted at the earliest of the following two events:
TDS is due when revenue is credited to the payee's account or any account, whether termed an 'Interest Payable account,' 'Suspense account,' or any other designation in the payer's
books.
It must also be subtracted when making a payment in cash, by check, draft, or any other method.
What is the rate of TDS?
Under Section 194A of the Income Tax Act, the standard TDS rate is 10% on interest income (other than securities) when the recipient provides a valid PAN. This rate is applicable only if the interest amount exceeds the prescribed threshold limits, and no TDS is deducted if the total interest remains within these limits. However, if the PAN is not furnished, the TDS rate increases to 20% as per the law. The deduction of TDS takes place at the time of credit or payment of interest, whichever occurs earlier, and the deducted amount must be deposited with the government within the prescribed timelines.
When is tax deducted at a nil rate or a lower rate?
The provisions of Section 194A do not apply uniformly in all cases, as TDS can be deducted at a lower rate or not deducted at all under certain conditions. Individuals whose total income is below the taxable limit can submit Form 15G, while senior citizens can submit Form 15H to avoid TDS on eligible interest income. Additionally, taxpayers can apply under Section 197 to obtain a certificate from the assessing officer for lower or nil TDS deductions. Once approved, TDS is deducted as per the rate specified in the certificate instead of the standard rate. It is important to ensure that all declarations are accurate, as incorrect information may lead to penalties, and maintaining proper records helps avoid unnecessary deductions and ensures smooth refunds.
Time Limit for Depositing TDS
TDS deducted under Section 194A must be deposited within the prescribed timelines to avoid interest and penalties. For TDS deducted between April and February, the due date for deposit is the 7th of the following month, while for TDS deducted in March, the deadline is 30th April. Timely deposit ensures proper compliance and avoids additional financial liabilities.
Examples:
If TDS is deducted on April 25, it must be deposited by May 7
If TDS is deducted on March 15, it must be deposited by April 30
Exemptions From TDS Under Section 194A
Certain types of interest income are exempt from TDS under Section 194A, subject to conditions and recent updates applicable for 2026. These exemptions help reduce unnecessary tax deductions and improve compliance for specific categories of taxpayers.
Interest earned on savings bank accounts
Interest received on income tax refunds
Interest paid by a partnership firm to its partners (exemption removed from April 1, 2025; now covered under Section 194T with 10% TDS if it exceeds ₹20,000 annually)
Interest paid to banks, LIC, UTI, or insurance companies
Interest paid by co-operative societies to their members (subject to turnover and updated threshold limits)
Interest paid by agricultural credit societies, co-operative land mortgage banks, or land development banks
Interest on compensation awarded by MACT (fully exempt from TDS from April 1, 2026)
Interest on Zero-Coupon Bonds issued by notified infrastructure or public sector companies
Section 194A Non-Compliance Penalties
Penalty under Section 271C: For non-deduction, equal to the amount of tax not deducted.
Penalty under Section 271H: For late/non-filing of TDS returns, ranging from ₹10,000 to ₹1 lakh.
Late Filing Fee under Section 234E: A mandatory fee of ₹200 per day for late filing, capped at the total TDS amount.
Interest under Section 201(1A): 1% per month for delay in deduction and 1.5% per month for delay in deposit from the date of deduction.
Other Consequences
Disallowance of Expenses: If TDS is not deducted, 30% of the interest expense will be disallowed as a deduction for the business.
Prosecution (Section 276B): Severe cases of non-payment (deducted but not deposited) can lead to imprisonment from 3 months to 7 years.
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