Section 194 of the Income Tax Act, 1961, deals with the deduction of tax at source (TDS) from interest income other than interest on securities. In simpler terms, when you earn interest on anything except for certain specified securities (covered under other sections like 193/197), the payer of that interest is required to deduct a portion of it as tax and deposit it to the government on your behalf.

Here’s a breakdown of the key points about TDS under Section 194:

Who deducts TDS under Section 194?

• Any person making a payment of Income Tax interest exceeding Rs. 10,000 in a financial year is responsible for deducting TDS under Section 194. This includes banks, individuals, companies, co-operative societies, etc.

What type of interest income is covered?

• Interest income from various sources like:
  • Fixed deposits (except FDs in specific banks or schemes)
  • Savings accounts (unless the total interest income falls below Rs. 10,000)
  • Deposits with companies
  • Loans and advances (excluding loans from banks)
  • Certain government securities not covered under other sections
  • Debentures not listed on a recognized stock exchange

What is the rate of TDS?

• The current rate of TDS under Section 194 Income Tax is 10%, if the payee furnishes their PAN. If the PAN is not provided, the TDS rate is higher at 20%.

Exemptions from TDS under Section 194:

• Individuals whose total income is below the taxable limit in a financial year.
• Institutions or funds exempt from income tax under the Act.
• Interest income up to Rs. 10,000 per year (if Form 15G/H is submitted to the payer).

Important points to remember:

• The TDS deducted under Section 194 Income Tax is not the final tax liability. You will need to consider this deducted amount during income tax filing for the year.
• You can claim credit for the TDS deducted in your income tax return.
• It’s important to provide your PAN to the payer to avoid the higher TDS rate of 20%.

 EXAMPLE

• This includes various financial instruments like government bonds, debentures, units of mutual funds, and interest on deposits with companies.
• It doesn’t apply to “interest other than interest on securities.” That category falls under Section 194A of the Income Tax

Therefore, case Income Tax laws specific to Section 194 wouldn’t be relevant for interest income other than interest on securities. Instead, you would need to consider case laws related to Section 194A, which governs:

• Interest on fixed deposits, recurring deposits, savings accounts
• Interest on loans and advances
• Interest on deposits with cooperative societies
• Interest on bonds (except listed debentures) issued by companies

Here are some key case laws Income Tax regarding Section 194A:

• CIT vs. Bombay Dyeing & Mfg. Co. Ltd. (2004): This case Income Tax clarified that interest on deposits received by a company from its employees or former employees qualifies as “interest other than interest on securities” under Section 194A.
• ICICI Bank Ltd. vs. ITO (2012): This case Income Tax dealt with the timing of TDS deduction under Section 194A, stating that it should be at the time of crediting the interest to the account or payment, whichever is earlier.
• Union of India vs. M/s. Vatika Builders Pvt. Ltd. (2017): This case Income Tax established that interest on advances received by a builder from buyers for construction purposes falls under Section 194A.