Section 193 of Income Tax Act - TDS on Interest on securitie

Introduction

For risk-averse investors, the allure of fixed-income securities is undeniable. Whether it is corporate debentures, government bonds, or the popular 7.75% Savings Bonds, these instruments offer steady returns without the volatility of the stock market. You invest your principal, and in return, the issuer pays you regular interest. It seems like a clean, simple transaction.

However, the Income Tax Department tracks this income closely. Just like your salary or bank fixed deposits, the interest you earn from these securities is subject to Tax Deducted at Source (TDS) under Section 193 of the Income Tax Act.

For a long time, investors enjoyed a specific loophole where listed debentures held in Demat form were exempt from TDS. That changed recently, catching many off guard. In this guide, we will decode the current rules of Section 193 for the financial year 2025-26, the updated threshold limits, and how you can ensure you are not paying more tax than necessary.

Table of Contents

1. What is Section 193 of the Income Tax Act?
2. What Qualifies as "Interest on Securities"?
3. The Major "Demat" Update (Listed Debentures)
4. Current TDS Rate for Section 193
5. Threshold Limits for TDS Deduction (2025 Update)
6. Exemptions: When is TDS Not Deducted?
7. Government Securities vs Private Securities
8. Penalties for Non-Compliance
9. How to Claim TDS Credit
10. FAQs

What is Section 193 of the Income Tax Act?

Section 193 mandates that any person responsible for paying "interest on securities" to a resident must deduct tax at source before releasing the payment.

The logic is simple. The government wants to collect tax on your passive income right when it is generated. This section applies to companies, local authorities, and the Central or State Governments when they issue bonds or debentures.

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What Qualifies as "Interest on Securities"?

The term "security" here is specific. It typically covers:

• Debentures or bonds issued by a company (like Non-Convertible Debentures or NCDs).
• Securities issued by a Local Authority or Corporation.
• Securities of the Central or State Government (like G-Secs or Treasury Bills).

If you hold any of these and receive an interest warrant or a direct bank credit, Section 193 is the provision that governs the tax cut.

Similar reads: Types of ITR Forms & Eligibility | Understanding form 15G and 15H

The Major "Demat" Update (Listed Debentures)

For years, one of the biggest advantages of holding NCDs (Non-Convertible Debentures) in Demat mode was the exemption from TDS. Paragraph (ix) of the proviso to Section 193 allowed companies to pay full interest without deducting tax if the security was listed and in Demat form.

However, the Finance Act 2023 removed this exemption.

Current Status: Even if your debentures are listed on the stock exchange and held in your Demat account, the company will deduct TDS on the interest paid. This rule continues to apply in 2025, ensuring that interest from NCDs is treated at par with interest from other sources.

Current TDS Rate for Section 193

The rate of deduction is straightforward, but it depends on whether your KYC is in order.

• Standard Rate: 10% on the interest amount.
• No PAN / Invalid PAN: 20% (Under Section 206AA).

Since most securities are now linked to Demat accounts, which require PAN, the 10% rate is the norm. However, if your PAN is "inoperative" (not linked with Aadhaar), the 20% rate will kick in automatically.

Threshold Limits for TDS Deduction (2025 Update)

TDS is not deducted for every small amount. There are specific threshold limits below which the payer is not required to cut tax.

1. Debentures Issued by Public Limited Companies

For a resident Individual or HUF, no tax is deducted if:

• The aggregate interest paid during the financial year does not exceed ₹5,000 (some recent budget proposals have pushed to unify this to ₹10,000, so always check the latest Finance Act fine print).
• The payment is made by an account payee cheque or electronic mode.

2. 8% Savings (Taxable) Bonds, 2003

No tax is deducted if the interest payable during the financial year does not exceed ₹10,000.

Exemptions: When is TDS Not Deducted?

Apart from the monetary thresholds, there are specific categories of securities and investors that are fully exempt from TDS under Section 193:

• National Defence Bonds/Loans: Interest on specific notified bonds like 4.25% National Defence Bonds, 1972.
• Gold Bonds: Interest on 6.5% Gold Bonds, 1977, or 7% Gold Bonds, 1980, held by resident individuals (nominal value limits apply).
• LIC and GIC: Any interest paid to the Life Insurance Corporation of India (LIC), General Insurance Corporation (GIC), or other insurers is exempt.
• Form 15G/15H: If an individual investor submits a valid Form 15G (below 60 years) or Form 15H (senior citizens) declaring that their total income is below the taxable limit, no TDS will be deducted.

Government Securities vs Private Securities

A common confusion arises regarding Government Securities (G-Secs).

Generally, no TDS is deducted on interest payable on any security of the Central Government or a State Government.

• Exception: This general exemption does NOT apply to the "8% Savings (Taxable) Bonds, 2003" or the "7.75% Savings (Taxable) Bonds, 2018". For these specific taxable bonds, TDS applies if interest exceeds ₹10,000.

For private corporate bonds (Debentures), TDS is practically mandatory unless you fall under the low-income threshold.

Penalties for Non-Compliance

This section applies to the payer (the company issuing the bond), not the investor. However, as an investor, you should be aware of the consequences if a company fails to deposit the tax it deducted from your income.

• Interest: The company must pay 1.5% interest per month for a delayed deposit.
• Disallowance: The interest expense is not allowed as a business deduction for the company.
• ** Prosecution:** In severe cases of failure to pay TDS, the company officers can face prosecution.

How to Claim TDS Credit

The tax deducted under Section 193 is not an extra cost; it is your tax paid in advance.

1. Form 16A: The company issuing the interest will provide you with Form 16A (TDS Certificate) quarterly.
2. Form 26AS / AIS: Always log in to the Income Tax e-filing portal and check your Annual Information Statement (AIS). The interest income and the TDS deducted should appear there.
3. Filing ITR: When you file your return, report this under "Income from Other Sources." The total tax liability will be calculated, and the TDS already paid will be subtracted. If you fall in a lower bracket, you will get a refund.