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

TDS on FD or Tax Deducted at Source on Fixed Deposits is an essential component of the Indian Income Tax Act. This blog will simplify and demystify the concept of TDS on FD, specifically under Section 194A, to help you better understand the intricacies of this tax deduction.

What is TDS on FD and Why is it Important?

Tax Deducted at Source (TDS) is a method used in India to collect tax on various sources of income, including interest earned on fixed deposits. When you invest in fixed deposits, whether through a bank or a non-banking financial institution, the interest you earn is subject to TDS if it exceeds a specific threshold. TDS on FD ensures that the government receives its due tax revenue.

If you're wondering about the nitty-gritty details of TDS on FD, here's what you need to know:

Section 194A of the Income Tax Act

Section 194A specifically deals with the provisions of TDS on interest other than on securities. In essence, if interest (other than on securities) is paid to a resident, TDS must be deducted under this section. It's essential to note that these provisions do not apply to non-resident individuals, as they fall under the purview of Section 195 of the Income Tax Act.

Key provisions of Section 194A include

1. Entities paying interest to Indian residents, individuals, and Hindu Undivided Families (HUFs) must deduct TDS.
2. TDS on interest must be deducted if a person or HUF is subject to audit under Section 44AB of the Income Tax Act.
3. 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.

Significance of Section 194A

Understanding Section 194A is crucial as it helps you plan your income tax liability effectively. If the payer deducts TDS on your fixed deposit interest when it's not required, you can file for Income Tax Returns (ITRs) to claim a refund on the excess amount. To prevent this, individuals not subject to TDS on FD can submit Form 15G or 15H to the payer before the money is deducted.

TDS Limits and Rates

It's important to be aware of the limits and rates related to TDS on FD:

1. TDS on fixed deposit interest earned up to Rs. 50,000 for senior citizens (individuals aged 60 and above) and Rs. 40,000 for others is excluded under Section 194A.
2. For FD interest exceeding Rs. 5 lakh or Rs. 10 lakh, an additional 10% or 20% tax deduction, respectively, is applicable in addition to TDS.
3. TDS on FD for Non-Resident Indians (NRIs) is 30%, and they are also subject to surcharge tax and cess.

Rules and Regulations of TDS on FD

Understanding the rules and regulations of TDS on FD is essential for both investors and financial institutions. Here's what you need to know:

Threshold Limit

TDS on FD is only applicable when the interest earned in a financial year exceeds the prescribed threshold limits. It's important to remember that only the interest is subject to taxation.

TDS Deduction Rate

Banks and financial institutions are required to deduct a fixed TDS on Fixed Deposits at a rate of ten percent on the interest earned during a fiscal year.

PAN Information

If an individual fails to provide PAN information for the FD account, they will be charged a TDS of 20% on the fixed deposit. The TDS is deducted using the PAN information of the primary account holder, and the secondary account holder is not responsible for TDS deductions.

Automatic Deduction

TDS is automatically deducted from your fixed deposit account by the bank or financial institution at the end of each fiscal year. This includes tax saver FDs as well.

How to Reduce TDS on Fixed Deposit

If you're looking to minimize TDS on your fixed deposits, consider these strategies:

1. Open a fixed deposit at your local post office. No TDS is deducted from post office FDs.
2. If your annual income is below the exemption limit (Rs. 2.5 lakh or Rs. 3 lakh for senior citizens), apply for a TDS exemption by submitting Form 15H or 15G.
3. You can also consider opening fixed deposit accounts for family members with lower incomes to spread the income and reduce the impact of TDS.
4. Diversify your investments by opening accounts with different banks or branches.

Section 194A TDS Deduction Explained

For a clearer understanding, let's break down the specifics of Section 194A:

When is a TDS Deduction Required?

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

• Any bank, whether it is a bank, a banking corporation, or a banking institution.
• A cooperative association that operates in the financial sector.

TDS Exemptions for Senior Citizens

TDS on fixed deposit interest is not applicable to interest earned by senior citizens if the total amount does not exceed INR 50,000. This exemption applies when the post office accepts deposits under the Central Government's schemes as well.

TDS Deduction at a Lower or Zero Rate

You can request a lower or zero TDS rate by submitting Form 15G or 15H under Section 197A. The following conditions must be met:

• 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 limits, with older citizens enjoying an exemption.
• The declaration is made in two copies (Form 15G for regular individuals and 15H for senior citizens).

Additionally, banks will not withhold TDS on FD when paying interest after the declaration is submitted.

You can also apply for a certificate authorizing the payer to deduct TDS on FD at a lower rate or none at all by submitting Form 13 to your Assessing Officer if certain conditions are met.

Understanding the provisions of Section 194A is essential for both taxpayers and entities that pay interest to their clients. By complying with these provisions, businesses can ensure they correctly deduct TDS on FD and maintain accurate records. Timely deductions and deposits of the TDS amount help businesses avoid penalties and additional consequences.