Here's Your Ultimate Guide to Understanding TDS on FD – Section 194A

The Income Tax Act of 1961 mandates the deduction of TDS on FD. Banks and other financial institutions provide fixed deposits as a way to save money while earning a greater rate of interest. The interest earned on FDs is taxed and added to the income. If your total income tax liability is zero, you can request a non-deduction of TDS on a fixed deposit by sending form 15G or 15H (for senior citizens) to the bank.

An Understanding of TDS on FD

Tax deduction at source (TDS) in India is a means of collecting tax on income, dividends, or asset sales by requiring the payer (or legal intermediary) to deduct tax due before paying the balance to the payee (and the tax to the revenue authority). The interest earned on a fixed deposit, whether made with a bank or a non-bank financial institution, is subject to TDS if it exceeds beyond the threshold limit. TDS on FD can be checked using Form 16A or your bank's Interest Certificate. Both of these forms also reflect the amount of interest that has been earned over time.

The Purpose of Section 194A

Section 194A deals with the provisions relating to TDS on interest other than on securities. Tax is to be deducted under section 194A, if interest (other than interest on securities) is paid to a resident. Thus, the provisions of section 194A are not applicable in case of payment of interest to a non-resident. Payments made to non-residents are also covered under TDS mechanism, however, tax in such a case is to be deducted as per section 195.

The following are the section's most important provisions :

• Entities paying interest to Indian residents must deduct TDS in addition to individuals and Hindu Undivided Families (HUFs).
• TDS on interest paid must be deducted if a person or HUF requests auditing of their accounts under section 44AB of the Income Tax Act, 1961.
• Individuals and HUFs must deduct TDS if their previous year's business revenue or gross receipts exceeded INR 1 crore for businesses and INR 50 lakhs for professions.

In addition, the section only applies to Indian residents, and its rules do not apply to Non-Resident Indians (NRIs), who are governed by Section 195 of the Income Tax Act, 1961.

Significance of Section 194A

According to the requirements of this section, interest generated on investments other than bank securities is subject to TDS deductions. If the recipient's permanent account number (PAN) is accessible, the payer must deduct 10% of the total interest; if the PAN information is not available, the payer must deduct 20% of the entire interest. Taxpayers can plan their income tax liability by understanding the requirements of this section and how TDS applies. Furthermore, if the payer has deducted TDS on fixed deposit interest when it is not required, the recipient may file Income Tax Returns (ITRs) and demand a refund on the excess amount. To avoid having to file a refund claim, beneficiaries who are not subject to TDS on FD should submit Form 15G or 15H to the payer before the money is deducted.

Key Points to Keep in Mind

• TDS on fixed deposit interest earned up to Rs. 50,000 for senior persons (individuals aged 60 and above) and Rs. 40,000 for others is excluded under Section 194A.
• According to the Income Tax Act of 1961, FD interest earned exceeding Rs. 5 lakh or Rs. 10 lakh is entitled for additional tax deductions of 10% and 20%, respectively, in addition to TDS.
• TDS on FDs is 30% for NRI citizens, who are also subject to surcharge tax and cess.

TDS on FD Rules and Regulations

• TDS on FD is only applied if the interest earned in a given financial year exceeds the threshold limitations (only interest is subject to tax).
• Financial institutions and banks must subtract a fixed TDS on Fixed Deposits at a rate of ten percent on the interest gained on an FD during a fiscal year.
• If an individual fails to furnish PAN information for the FD account, he or she would be charged a TDS of 20% on the fixed deposit.
• TDS on fixed deposits is deducted using the PAN information of the primary account holder, and the secondary account holder is not accountable for any TDS on FD deductions.
• TDS is automatically deducted from your fixed deposit account by a relative bank or a financial institution at the conclusion of each fiscal year.
• TDS is deducted from the interest earned on a tax saver FD.

Features of TDS on Fixed Deposits

• Prior to Budget 2019, the TDS threshold on FD interest was Rs. 10,000, which was increased to Rs. 40,000 in Budget 2020.
• When earnings exceed the statutory threshold, banks are required to remove 10% of the interest amount annually.
• The absence of crucial documentation such as a PAN card may result in increased TDS on FD.
• If your total income (including FD interest) is below the exemption level (i.e., less than Rs. 2.5 or 3 lakh) but your fixed deposit earnings are over the threshold (i.e., 40,000 or 50,000), your bank can still deduct TDS on FD interest.
• If you have a modest taxable income, you can request TDS exemption for fixed deposits using forms 15H and 15G.

Ways to Reduce TDS on Fixed Deposit

• You can open a fixed deposit at your local post office because no TDS is deducted from FDs.
• If your annual income is less than Rs. 2.5 lakh or Rs. 3 lakhs (for those beyond 60 years old), you can apply for a TDS exemption for fixed deposit interest by filling out form 15H or 15G.
• TDS on fixed deposit interest is determined by your entire annual income. If your spouse or children do not earn or earn less than Rs. 2.5 lakh, you can open fixed deposit accounts for them. Before taking this step, talk to your bank or a CA or Tax practitioner.
• To reduce or avoid TDS on FDs, invest or open accounts with different banks or branches.
• Invest after carefully considering the workings of fixed deposit TDS.

Section 194A TDS Deduction: What You Need to Know

TDS Deduction is required if the interest earnings during a financial year (FY) exceed INR 40,000, the payer is:

• Any bank, whether it is a bank, a banking corporation, or a banking institution.
• A cooperative association that works in the financial industry.
• TDS on fixed deposit interest is not applicable on interest earned by senior citizens if the total amount does not exceed INR 50,000 if the post office accepts deposits under the Central Government's schemes.

TDS is not applied on interest earned by senior citizens if the total amount does not exceed INR 50,000.

• In addition, the following sorts of investments should earn interest :
• Deposits in a bank
• Schemes of recurring deposits
• Deposits at the post office
• Fixed Deposits

The Application of TDS Deducted at a Lower or Zero Rate

This is valid in the two situations given below :

• When a declaration in Form 15G or 15H is submitted under Section 197A

If the following requirements are met, no tax is deducted if a declaration pursuant to Section 197A is made along with the taxpayer's PAN details.

• The beneficiary is not a corporation or a firm.
• There is no tax liability for the prior year's entire income.
• The total income does not exceed the exemption limitations; however, older citizens are exempt from this criterion.
• The declaration is made in two copies (Form 15G for regular individuals and 15H for senior citizens)
• In the event of the depositor's death, nominees of the Senior Citizens' Savings Scheme (SCSS) can also submit the declaration at the time of payment.

Banks will not withhold TDS on FD when paying interest after the declaration is submitted.

• When you submit a Form 13 application under Section 197
• According to the rules of this section, taxpayers can submit a Form 13 to their Assessing Officers to obtain a certificate authorizing the payer to deduct TDS on FD at a lower rate or none at all if certain circumstances are met.
• The application has no time restriction and can be submitted at any time before the deduction; however, if the receivers do not have a PAN card, they will be unable to submit it.
• This certificate for TDS deduction at reduced or zero rates cannot be provided retroactively.
• This certificate can be presented to the income payer for a lower or no TDS deduction.

Understanding the provisions of section 194A aids taxpayers in streamlining the process of obtaining eligible benefits as quickly as possible. In addition, entities who pay interest to their clients should be aware of the section's provisions. This guarantees that businesses correctly deduct TDS on FD and keep track of the relevant records. Making timely deductions and depositing the TDS amount on or before the due date ensures that businesses are not penalized or subjected to additional consequences.