Introduction
Many people receive income in the form of interest, such as interest from bank deposits, fixed deposits, or loans. The government taxes this interest income, and to ensure tax is collected on time, TDS (Tax Deducted at Source) is applied. The rules for deducting tax on interest income are defined under Section 194A of the Income Tax Act. This section applies mainly to banks, co-operative societies, post offices, and financial institutions when they pay interest to individuals. Understanding Section 194A is important because it helps taxpayers know when TDS is deducted, when it can be avoided, and how to file forms to lower or avoid unnecessary deductions. Let us understand this in a very simple way.
What is Section 194A?
Section 194A deals with TDS on interest income (other than interest on securities). It means if someone receives interest on:
- Bank deposits (Savings/FD/RD)
- Post office deposits
- Loans and advances
- Corporate bonds (non-securities category)
The payer must deduct TDS before giving the interest amount.
This section applies only to persons who are not under audit exemption.
Also, Section 194A does NOT apply to:
- Interest on Government securities (covered elsewhere)
- Interest paid to banks
- Interest on a savings bank account
It is mainly used when banks deduct TDS if the interest amount crosses the threshold limit in a financial year.
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Latest Amendments as per Budget 2025
The Union Budget 2025 has continued the same threshold limits for tax deduction on interest income. A significant change has been seen in the threshold limit for banks, co-operative societies, and post offices, especially for senior citizens.
Payer of Interest: Bank/Co-op Society/Post Office. Recipient: Senior Citizen (Age 60+). New Threshold Limit (FY 2025-26): ₹1,00,000.
Payer of Interest: Bank/Co-op Society/Post Office. Recipient: Other than a Senior Citizen. New Threshold Limit (FY 2025-26): ₹50,000.
Fundamental Provisions of Section 194A
- TDS applies to interest income earned on deposits.
- TDS should be deducted at the time of credit or payment, whichever is earlier.
- Deductor must issue the TDS certificate (Form 16A) to the deductee.
- Deductee (receiver) can claim credit of deducted TDS while filing ITR.
Applicability of Section 194A
Category
Applicability Status
Key Conditions / Details
Fixed Deposits (FDs) / RDs
TDS Applicable
If the annual interest crosses the specific threshold limit (see below).
Unsecured Loans / Corporate Bonds (Non-Securities)
TDS Applicable
If the annual interest crosses the ₹10,000 threshold.
Savings Account Interest
TDS NOT Applicable (Exempt)
Interest is not subject to TDS under this section, regardless of the amount.
Interest on Income Tax Refund
TDS NOT Applicable (Exempt)
Interest paid by the government on delayed tax refunds.
Interest to Partner by a Firm
TDS NOT Applicable (Exempt)
Interest paid by a partnership firm to its partners.
Interest paid to Banks/LIC/UTI/Mutual Funds
TDS NOT Applicable (Exempt)
Payments made to specified financial institutions.
194A TDS Rate – Threshold & Rate
Payer of Interest
Recipient Category
Threshold Limit (Interest per year)
TDS Rate (with PAN)
TDS Rate (without PAN)
Bank, Co-op Society, Post Office
Senior Citizen (Age 60+)
Above ₹1,00,000
10%
20%
Bank, Co-op Society, Post Office
Other Resident
Above ₹50,000
10%
20%
All Other Payers (Company, Audited Individual/HUF, etc.)
Any Resident
Above ₹10,000
10%
20%
When can TDS be Deducted Under Section 194A?
TDS is deducted if:
- The interest amount exceeds the threshold limit
- Payment is made in cash, cheque, or credited to the account
- Deductor has a valid PAN of the deductee
Time Limit for Depositing TDS
Month of Deduction
Due Date for Deposit
April to February
7th of next month
March
30th April
Exemption from TDS
TDS under Section 194A is not applicable in the following main situations, even if the interest amount is high:
- Savings Account Interest: Interest earned on a regular Savings Bank Account is completely exempt from TDS under this specific section.
- Below Threshold Limit (Small Payments): TDS is not cut if the total interest amount in a year is below the fixed threshold limit (e.g., ₹50,000 or ₹1,00,000 for banks/Post Office in FY 2025-26).
- Interest on Tax Refund: Interest received from the government on an Income Tax Refund is not subject to TDS.
- Interest Paid to Specific Institutions: Interest paid to certain entities like any banking company or co-operative bank, the Life Insurance Corporation of India (LIC), the Unit Trust of India (UTI), or the Central/State Government.
- Agricultural Loan Interest: Interest paid on a loan that was given for agricultural purposes.
- Interest to a Partner: Interest paid by a partnership firm to its partners is exempt from TDS under this section.
Circumstances for TDS at Lower or Nil Rate
1. Submitting Form 15G or Form 15H
- Purpose: These forms are used to declare to the payer (e.g., the bank) that your total tax liability for the financial year is NIL (zero). Upon receiving the correct form, the bank will generally not deduct TDS.
- Form 15G: This form is for regular individuals (not senior citizens). You can submit it if your total income for the year results in zero tax liability.
- Form 15H: This form is exclusively for Senior Citizens (age 60 or more) who declare that the tax on their estimated total income for the year is going to be zero.
2. Getting a Certificate from the Income Tax Officer (Section 197)
- Procedure: You can formally apply to your local Income Tax Officer and demonstrate that your actual tax liability for the year is either zero or very low.
- Result: If the officer is satisfied, they will issue a Certificate for Lower or Nil Deduction of TDS. You then provide this certificate to the payer (e.g., the bank), and they will deduct tax at the lower rate mentioned in the certificate (which can be 0%).
How Can Individuals Prevent TDS Deductions on Interest Income?
- Submit Form 15G/15H to the bank in April every year.
- Ensure PAN is linked to Aadhaar.
- Track interest income and file ITR to claim any excess TDS refund.
Conclusion
Section 194A ensures tax collection on interest income in a systematic way. Understanding threshold limits, exemption forms, and TDS rates helps individuals avoid unnecessary deductions and penalties. By following simple compliance rules such as submitting Form 15G/15H and keeping PAN updated, taxpayers can manage their tax burden more efficiently.