The Income Tax Act provides for a system of tax deduction at the time of generation of income by an assessee. Such tax is deducted by the payer at the time of origination of income in the hands of the payee, and is remitted by the payer to the Central Government on behalf of the payee. Tax deducted at source (or TDS) is levied at a predetermined rate. This article strives to put across TDS mechanism in respect of two major payments, namely TDS on interest on securities and TDS on interest other than securities. TDS on interest on securities – Section 193 Section 193 is specifically concerned with provisions relating to TDS on interest on securities. If a person pays any income by way of interest on securities to a resident, it attracts the applicability of Section 193. Such TDS is to be deducted by every payer who is responsible for paying interest on securities to a resident. The provisions are not applicable where interest on securities is paid to a non-resident, which is driven separately by Section 195. TDS on interest on securities under Section 193 is deducted @ 10% where payee furnishes his PAN details. Otherwise, TDS is levied @ 20%. This 10% rate is applicable both in the case of domestic companies and resident non-corporate assessees. Some cases where TDS will not be deducted under this section are: If the payee provides a self-declaration in Form 15G/15H to the payer to the effect that his income falls below the exemption limit; when the payee has obtained a certificate from the Assessing Officer for no deduction or lower deduction of tax; interest on 4.25% National Defense Bonds 1972; interest on 4.25% National Defense Loan 1968, interest on 4.75% National Defense Loan 1972; interest on National Development Bonds; interest on 7-year National Savings Certificates; interest on securities of Central Government or State Government, etc. For interest on debentures issued by a company, TDS under Section 193 is not deducted if payment is within the threshold limit as follows: Also, Read: Income Tax Changes to be expected in Budget 2020-2021. Payer Payee Threshold Limit Widely held company Resident Individual or HUF Interest does not exceed Rs. 5,000 and interest is paid by an account payee cheque. Furthermore, for interest on 8% Savings (Taxable) Bonds 2003 and 7.75% Savings (Taxable) Bonds 2018, TDS on interest on securities under Section 193 is not deducted if payment is within the threshold limit of Rs. 10,000. For example, Mr. X has invested some amount in ABC Limited and the company has paid him an interest of Rs. 4,50,000 after deducting tax at source @10%. In this case, his tax liability and tax refund, if any for AY 2020-21 will be computed as follows: Income from Other sources – Gross Interest (4,50,000/90%) Rs. 5,00,000 Total income Rs. 5,00,000 Tax on Rs. 5,00,000 Rs. 12,500 Less: Rebate under Section 87A Rs. 12,500 Tax liability Nil Less: TDS 50,000 Refund 50,000 Thus, the full TDS amount will be refunded to Mr. X at the time of filing his ITR. TDS on interest other than interest on securities – Section 194A Tax is deducted under Section 194A of the Income Tax Act if any interest (not being interest on securities) is given to a resident. Such interest may include interest paid on an unsecured loan, interest paid on fixed deposits with banks, interest paid on loans and advances, etc. Payments of interest made to a non-resident are dealt with under a separate section (Section 195). For example, a partnership firm (Fixe Enterprises) pays interest @10% on loan of Rs. 4,20,000 taken from a resident individual in India. While paying Rs. 42,000 interest on such loan for the financial year 2019-20, Fixe Enterprises has to deduct TDS under Section 194A. Such TDS is to be deducted by every payer (other than an individual or HUF) who is responsible for paying interest other than on securities to a resident. However, individuals or HUF will also be liable to deduct TDS if their accounts were required to be audited under Section 44AB in the previous FY. For example, Mr. Kapil is running a proprietary business having a total turnover of Rs. 91,00,000 during the FY 2018-19. On 1-4-2019, he obtained a business loan from a resident friend, the interest on which amounted to Rs. 52,000 for the FY 2019-20. Mr. Kapil is not liable to deduct tax from interest of Rs. 52,000 since his turnover was below Rs. 1,00,00,000 and is not covered under tax audit for the preceding FY. No TDS is to be deducted if the amount of interest payment to the payee during a financial year does not exceed the following limits: Payer Threshold limit if Payee is Senior Citizen Others Banking Co. 50,000 40,000 Co-operative Societies engaged in banking business 50,000 40,000 Post Office 50,000 40,000 In any other case 5,000 5,000 Suppose Twinkle Enterprises, a partnership firm obtains a loan of Rs. 9,500 from an individual residing in Mumbai (friend of one of its partners). The interest on loan for the FY 2019-20 amounts to Rs. 950. In this case, since the annual interest is below the threshold limit of Rs. 5,000, the firm is not liable to deduct TDS while paying interest of Rs. 950. Had the loan amount been Rs. 95,000, then the firm would have deducted TDS on the entire interest amount of Rs. 9,500 (being higher than Rs. 5,000). To illustrate with another example, suppose Mr. Ganesh earns an annual interest of Rs. 36,000 on a fixed deposit with ABC Bank. The bank will not deduct TDS from the interest to be paid to Mr. Ganesh as it is below Rs. 40,000. Some cases where TDS will not be deducted under this section are: If the resident individual (payee) furnishes a self-declaration in Form 15G/15H to the payer to the effect that his income falls below the exemption limit; when the payee has obtained a certificate from the Assessing Officer for no deduction or lower deduction of tax; interest credited or paid by a firm to its partners; interest paid to any banking company; interest paid to any financial corporation; interest paid to the Life Insurance Corporation of India; interest paid to the Unit Trust of India; interest paid to any company or co-operative society carrying on the business of insurance, etc. TDS under Section 194A is deducted @ 10% where payee furnishes his PAN details. Otherwise, TDS is levied @ 20%. For example, a partnership firm obtains a loan from Mr. Pankaj residing in Gujarat. The annual interest on such loan amounts to Rs. 65,200 and Mr. Pankaj fails to provide his PAN. In this case, the firm deducts TDS from interest paid to Mr. Pankaj @ 20%, which amounts to Rs. 13040. Some common regulations Section 193 (TDS on interest on securities) and 194A (TDS on other interest) prescribe that TDS must be deducted at the time of payment or credit of interest amount, whichever is earlier.It is the responsibility of the payer to deposit TDS under Section 194A/193 to the credit of the Central Government, as shown below: TDS during April to February On or before 7th of the succeeding month TDS during March On or before 30th April Takeaway The Central Government has designated TDS to be employed as a tool to tax the income (partially or wholly) at the time when it is generated rather than at a later date. This indeed aids in minimization of tax evasion. TDS on interest on securities and TDS on other kinds of interest income are levied @10% by virtue of Sections 193 and 194A of the Income Tax Act. Also, Read: Rules of tax on PF withdrawal – Whether withdrawal of EPF balance attracts TDS?.