This article has been written by Nikunj Arora, a student of Amity Law School, Noida. This article provides a detailed overview of Section 194 and 194A of Income Tax Act, 1961, along with the applicable Income tax rules. This article also discusses some important terms and the forms which have to be filled by the taxpayers under these Sections. 

It has been published by Rachit Garg.

Introduction 

Assessees are required to pay income tax on their total income for the previous year, as per the Income Tax Act, 1961 (ITA). Due to the fact that most returns are generally filed at the end of the financial year, it may be difficult for assesses like you to pay the full amount by the due date. Tax deduction at source is provided by the Central Board of Direct Taxes (CBDT) on various occasions in order to ease the burden of assessees. A deduction means that the tax due on an income is deducted on your behalf by the payer, prior to the income being credited or paid to you. In this case, the payer will be referred to as a “deductor,” while you will be referred to as a “deductee”. The assessee will then no longer be concerned about paying taxes at the end of the year, as the deductor would be paying them on your behalf. Further, it will lead to greater compliance among the general public, making tax refunds more readily accessible at the time of the filing of tax returns.

Tax deductions at the point of generating income have been incorporated into the Income-Tax Law in order to streamline the collection of taxes quickly and efficiently. “Tax Deducted at Source”, or TDS is the name for this system. The point of origination of income determines when tax is deducted. The payer deducts tax from the payee and remits it directly to the government on the payee’s behalf.

Section 192 to 194 IB of the ITA provides for the provisions of TDS. A deduction at source is not allowed for all types of income, but only for those that are specifically listed under the ITA. This article specifically focuses on the provisions of Section 194 and 194A of the ITA.

Section 194 of the Income Tax Act, 1961

According to Section 194 of ITA, the principal officer of an Indian company (or a company which has made the prescribed arrangements for the declaration and payment of deemed dividend in India) is required (before making any payment of dividend to a resident) to deduct tax at source from the amount of dividend at the prescribed rate. However, the tax deduction is not required, if on such payment, the payer company is subject to dividend tax under Section 115-0. In other words, if dividend tax is applicable under Section 115-O of ITA, TDS under Section 194 is not required. TDS under Section 194 is required only when dividend tax under Section 115-O is not applicable.

The table given below pinpoints when Section 115-O (or Section 194) is attracted.

Dividend (other than deemed dividend under Section 2(22)(e)Deemed dividend under Section 2(22)(e)
Dividend distribution up to March 31, 2018 Dividend tax under Section 115-O applicable (no TDS under Section 194)Dividend tax under Section 115-O not applicable (TDS under Section 194 is required) 
Dividend distribution on or after April 1, 2018Dividend tax under Section 115-O applicable (no TDS under Section 194)Dividend tax under Section 115-O applicable (no TDS under Section 194)

When a domestic company pays a dividend to a resident shareholder according to Section 2(22)(e), the principal officer is responsible for deducting the tax. On dividends considered under Section 2(22)(e), the TDS rate is 10%. However, there shall be no surcharge, for health and education. It is imperative to note that Section 115-O does not apply to dividends covered by TDS. 

For the period between April 1, 2003, and March 31, 2018, tax can only be deducted under Section 194 for deemed dividends under Section 2(22)(e). The tax deduction under Section 194 is not applicable to dividends (normal or deemed) as of April 1, 2018.

The Amendment

The shareholder can enjoy tax exemption on his or her dividends if he or she receives a dividend from a domestic company, up to the assessment year 2020-21. At this time, domestic companies were required to pay Dividend Distribution Tax (DDT). The Finance Act 2020, however, has abolished DDT for the companies, and consequently, investors are now taxed on dividend income.

The investors are taxed on their dividend income only if the dividend is distributed after April 1, 2020. In this situation, all dividends will be taxable in the investors’ hands, and they will be responsible for paying dividend taxes. There will be no requirement that the companies pay DDT.

Earlier, DDT was applied to dividends paid by an Indian company to its shareholders on or before 31 March 2020. Dividend distributions by the Indian company were not subject to withholding taxes, regardless of whether the recipients were corporations, pass-throughs, or individuals. Such dividends were additionally taxable at 10% for specified Indian residents (plus surcharges and cess).

Now, DDT is no longer applicable to Indian companies paying dividends; instead, the company should withhold tax at source from the dividend payment on behalf of the recipient since the recipient is now subject to tax.  Withholding tax is deducted from dividends paid to resident shareholders at a rate of 10%, and it is deducted from dividends paid to non-resident shareholders at a rate of 20% (plus applicable surcharges and cess).

Exemption/relaxation from the provisions of Section 194

The following are the exceptions from the provisions of Section 194:

Section 197 of Income Tax Act, 1961

Where the recipient applies to the Assessing Officer in the prescribed form. Form No. 13 must be filled out by the recipient, requesting a certificate from the Assessing Officer authorising the payer to deduct tax at a low rate or no tax.

As per Section 197 of ITA, the tax deduction at source can be equal to zero or at a lower rate of tax. If the TDS is likely to be deducted on certain receipts, the assessee with that TDS will have to make a request to the TDS Assessing Officer who has jurisdiction over his/ her/ its case to receive the benefit. In Form No 13, the assessee/deductee can apply for a certificate for zero or low TDS deductions on their receipts. The correct filing of the prescribed form and submitting all the required details along with it will help avoid any delays. 

For the Assessing Officers, the commissioner of Income Tax (TDS) has issued certain guidelines to streamline the process of handling applications received under Section 197 and disposing of the same within a stipulated deadline in accordance with the Citizens’ Charter. As a result of these guidelines, the Assessing Officer is required to make a decision on applications under Section 197 within 30 days after receiving them which are complete in all respects. In general, the intent behind Section 197 is to strike a delicate balance between ensuring the taxpayer has cash available and realising government dues as soon as possible.

Form 15H/15G 

Form 15H

Deductees with income that is lower than the taxable limit may use Form 15H or 15G to avoid TDS deduction at source. Individuals who are claiming certain receipts without deduction of tax can make a declaration under sub-section (1C) of Section 197A of ITA, if they are sixty years of age or more. Here are a few things to remember:

  • It is only possible to submit form 15H by individuals over the age of 60.
  • There should be no estimated tax for the previous assessment year. Therefore, he paid no tax for the previous year as his income did not reach the taxable limit.
  • You will be required to submit form 15H to banks if the interest from one branch is more than INR 10000/- per year.
  • All deductors to whom you have extended a loan should receive this form. Suppose you have deposited Rs. 100,000 at three branches of the SBI bank. It is your responsibility to submit form 15H to each branch. It should be submitted before your first notice of interest is received. Though not mandatory, it will prevent the deduction of TDS. In the event of a delay, the bank will deduct the TDS and issue the TDS certificate.
  • If you earn interest on loans, advances, debentures, bonds, or any type of interest income other than interest on bank deposits, you must file form 15H.

Form 15G

Under the provisions of sub-sections (1) and (1A) of Section 197A of ITA, an individual or person (other than a company or a firm) can declare certain receipts without deducting tax. Here are a few things to remember:

  •  Form 15G can be submitted by individuals younger than 60 years of age and by Hindu Undivided Families.
  • As with Form 15G, the points that apply to 15H also apply to 15G, except that Form 15H is only applicable to senior citizens.
  • Fixed deposit interest should be reported on Form 15G prior to receipt of interest. 

Important terms

Principal officer

Section 2(35) defines a company’s “principal officer” as:

  • the secretary, treasurer, manager or agent of the company; or 
  • any person connected with the management of the company upon whom the Assessing Officer has served a notice of his intention of treating him as the principal officer thereof.

In ITO v. Joseph (1972), the Kerala High Court stated that unless the assessor serves him with a notice of the intention to treat him as a principal officer, a managing director cannot be treated as the principal officer of a company, so long as he is not handed a notice of such intention by the assessor.

Indian company

A company incorporated under the Companies Act, 1956 is considered an Indian company under Section 2(26). The following are also included: 

  • The company must be formed under one of the laws applicable to companies formerly in force in any part of India other than the state of Jammu and Kashmir and the Union territories;
  • Corporations created by or under federal, state, or provincial legislation;
  • A body or institution that has been declared a company under Section 2(17) by the Board;
  • Any company formed and registered in Jammu and Kashmir pursuant to the laws of the state;
  • Any company incorporated and registered under any law applicable to the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu, and Pondicherry. 

Unless otherwise stated, a company, corporation, institution, association or body will only be considered a company if its registered office is located in India. 

Arrangement for declaration and payment of dividends in India

According to Rule 27 of the Income Tax Rules, 1962, a company must satisfy three requirements cumulatively in order to be counted as a company with “arrangements for declaration and payment of dividends within India”, as defined in Section 194:

  • Share register: At its principal place of business in India, the company should regularly maintain its share register for all shareholders starting on April 1 of any assessment year.
  • General meeting: For the purpose of passing the accounts and for declaring dividends relating to the corresponding previous year, the general meeting should be held only within India.
  • Dividend payable: Shareholders should be entitled to the dividends, if any, only within India. 

When should tax be deducted

In order for a company that has made arrangements to declare and pay dividends within India, or a company that pays dividends within India, the principal officer of the company is required to deduct the tax due on dividends at the rates in effect. In the following circumstances, tax is deductible as early as possible:

  • Before any dividend is paid in cash; or 
  • Before issuing a dividend check or warrant;
  • Before providing any payment or distribution to a shareholder of any dividend, within the meaning of Section 2(22).

Deposit of tax

Taxes are payable to the Central Government in the following manner:

  • Regardless of the assessment year or the financial year for which the tax is to be paid, each corporate assessee and all other assesses, who are subject to compulsory audit under Section 44AB, must make electronic payments of tax via internet banking service offered by authorised banks, on or after March 31, 2008. They are also able to pay their taxes electronically by credit or debit card through the internet.
  • If tax is deducted on the last day of a given month, tax should be deposited within seven business days of that date. It is possible, however, to deposit tax deducted during the month of March by April 30 following the end of the financial year.
  • A challan (ITNS 281) must be used to deposit the tax deducted at source.
  • The deductor is required to submit Form No. 26B electronically under digital signature prior to filing a claim for refund of TDS paid to the credit of the Central Government under Chapter XVII-B.  

Issue of certificate:

The person deducting taxes from dividends must issue a quarterly certificate in Form No. 16A. Even if the tax is paid by the payer of income, the recipient of the income must receive a certificate in Form No. 16A within the stipulated time. The following deductors shall produce TDS certificates in Form No. 16A by downloading them from the TIN website:

  • any deductor (including a Government deductor who deposits TDS in the Central Government Account through book entry), if tax is deducted on or after April 1, 2012, and
  • any company (including a banking company), if tax is deducted on or after April 1, 2011.

Taxpayers can download Form No.16A from the TIN website in order to issue TDS certificates. 

Section 194A of the Income Tax Act, 1961

In Section 194A of the ITA, provisions are dealt with regarding TDS on interest other than on securities. In the event that interest (other than interest on securities) is paid to a resident, taxes are due under Section 194A. As a consequence, the provisions of Section 194A do not apply when the payment of interest is made to a non-resident. TDS can also be deducted on payments made to non-residents, however, it is mandatory in such a case to deduct the tax in accordance with Section 195 of the ITA.  

This Section, therefore, becomes applicable when “interest other than interest on securities” is paid and the deductee is a resident. There are, however, a number of conditions that apply to this application. It is further noteworthy that this Section places responsibility on the deductor, rather than on the deductee.

Any person, (not being an individual or a Hindu undivided family), who is responsible for paying to a resident any income by way of interest other than income chargeable as interest on securities, is required to deduct income-tax thereon at the rates in force at the time of credit of such income to the account of the payee or “interest payable account” or “suspense account” or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier.

In Solar Automobiles India (P.) Ltd. v. CIT (2012), the Karnataka High Court stated that tax is to be deducted at sources even where due to losses, no interest is paid by the assessee to its creditors but credit entry of interest is made.

In CIT v. S.K. Sundararamier & Sons [1999], the Madras High Court stated that the deduction of tax is to be made from gross interest and not net interest payable after mutual set off between parties.

Tax rates

For the financial year 2019-20, the TDS rate is 10 percent (no surcharge, health and education cess, etc.). If the recipient does not furnish his PAN to the deductor, tax will be deducted at the rate of 20 per cent. PAN of the deductee should be mentioned in any correspondence and document which is exchanged between the deductor and deductee.

Adjustment in the case of short deduction

The person responsible for making the payment at the time of making any deduction, increases or reduces the amount to be deducted under Section 194A for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year.

When Section 194A is not applicable 

By virtue of Section 194A(3) and 197(IC), tax is not deductible in the following cases:

  • Where the aggregate amount of interest credited or paid (or likely to be credited or paid) during the financial year does not exceed a specified amount;
  • Where interest is credited or paid to any banking company, co-operative bank, public financial institutions, the Life Insurance Corporation, the Unit Trust of India, an insurance company or a co-operative society carrying on the business of insurance, or notified institutions;
  • Where interest is credited or paid by the firm to its partner(s);
  • Where interest is credited or paid by a co-operative society (other than a co-operative bank) to its members (i.e. interest on time deposits to its members holding on share or to any other co-operative society);
  • Where interest is credited or paid in respect of deposits under the schemes of Post Office (Time Deposits), Post Office (Recurring Deposits), Post Office Monthly Income Account, Kisan Vikas Patra, National Savings Certificates VIII Issue and Indira Vikas Patra;
  • Where interest is credited or paid in respect of deposits (other than time deposits made on or after July 1, 1995) with a banking company or interest to non-members on deposits with a co-operative  bank;
  • Where interest is credited or paid in respect of deposits (by non-members) with a primary agricultural credit society or primary credit society or co-operative land mortgage bank or co-operative land development bank;
  • Where interest is credited or paid by the Central Government under different provisions of the direct taxes;
  • Where the interest is paid (or, up to May 31, 2015, credited) on compensation awarded by the Motor Accidents Claims Tribunal if the amount of payment or the aggregate amount of such payment does not exceed Rs. 50,000;
  • Income paid/payable by an infrastructure capital company/fund or public sector company in relation to zero-coupon bonds;
  • Interest paid or payable by an Offshore Banking Unit on deposits (or borrowing) made on or after April 1, 2005, by a person who is resident but not ordinarily resident in India; and
  • Interest referred to in Section 10(23FC).

How is TDS deducted under Section 194A

Section 194A requires the following people to deduct TDS from interest:

  • Those other than individuals or Hindu Undivided Families (HUFs). Banks, cooperative societies, post offices, etc., are included in this category.
  • This category may also cover individuals or HUFs whose total sales, gross receipts, and turnover from the business or profession carried on by them exceed the monetary limits specified in Section 44AB during the previous financial year (financial year preceding the year in which the income is credited to the deductee).

Under what circumstances the TDS must be deducted under Section 194A

TDS must be deducted where the amount of interest paid or credited to the payer/deductor, or that is likely to be paid or credited within a financial year, exceeds INR 40,000 and the payer is:

  • An institution of banking or a banking company.
  • Co-operative society engaged in the business of banking.
  • Post office (under a central government-framed and notified scheme).

Partnership firms are not subject to Section 194A’s provisions relating to the interest they pay or credit to their partners. Therefore, the firm in this case does not have to deduct taxes from interest payments to partners.

The following are a few other instances where tax cannot be deducted:

  • Interest paid to any bank or cooperative operating as a bank, including a cooperative land mortgage bank covered by the Banking Regulation Act, 1949.
  • All interests are paid to any financial corporation that is established by the federal, state, or provincial governments.
  • An interest payment to the Life Insurance Corporation of India under the 1956 Life Insurance Corporation Act, 1956.
  • Payment of interest to a Unit Trust of India established under the Unit Trust of India Act, 1963.
  • The interest which is paid to any company or a co-operative society engaged in the business of insurance.
  • Interest payable to any other institutional, association, or body or class of institutions, associations, or bodies notified by the Central Government on or before 31 March 2021.
  • The interest paid or credited by a cooperative society to its members (other than a cooperative bank) or to any other cooperative society.
  • The rate of interest credited or paid by the Central Government on deposit notifications.
  • The interest is credited or paid on deposits held at primary agricultural credit societies, primary credit societies, co-operative land mortgage banks, or co-operative land development banks. 
  • Under any provision of the ITA or the Wealth-Tax Act, 1957, the Central Government credits or pays interest.
  • A zero-coupon bond whose issue date is on or after the 1st of June 2005 and whose coupon rate is paid or payable by an infrastructure capital company, infrastructure capital fund, infrastructure debt fund, public sector company, or scheduled bank.
  • Special purpose vehicle interest is paid to a business trust according to Section 10(23FC) of ITA.

Can Tax be deducted at a lower or NIL rate

Similar to Section 194, under Section 194A, tax can also be deducted at a lower or NIL rate, provided the following conditions are satisfied:

  1. Declaration under Section 197A using form 15G/15H, and
  2. Submission of Form 13 application under Section 197.

Declaration under Section 197A using form 15G/15H

The recipient must submit a declaration to the payer under Section 197A along with his/her PAN in order to deduct tax if the following conditions are met:

  • Persons other than companies or firms are recipients.
  • Tax on total income of the previous year (PY) is NIL.
  • The total income for the year is not greater than the exemption limit (that is, for the annual year 2020-21, Rs.2,50,000 or Rs.3,00,000 or Rs.5,00,000, as and whenever applicable). In the case of recipients who are senior citizens, this condition does not apply.
  • A similar declaration must be submitted in duplicate on Form 15G. Form 15H shall be for senior citizens. Investors can submit the declaration under the Senior Citizens Savings Scheme, 2004 (SCSS).
  • In addition, the nominees of SCSS investors can also present the declaration upon payment after the death of the depositor.
  • A bank shall not deduct tax from interest payments upon receiving a declaration (subject to conditions).

Submission of Form 13 application under Section 197

Section 197 allows the recipient to request a certificate to be issued to the Assessing Officer, authorising the deduction of income tax at a lower rate (or a tax-free deduction if certain conditions are met).

  • Applications can be filed at any time before taxes are actually deducted. The certificate cannot be issued to a recipient who does not possess a PAN.
  • Applicants should receive a certificate with a piece of advice. The certificate will be mailed directly to the person who pays income, on plain paper.
  • Retrospective certification is not available.
  • Copy of such a certificate may be provided by the recipient to the person paying the income for lower/no deductions at source.

Rate of TDS

The following tax rates are in effect:

  • When the PAN is furnished, interest is credited at 10% (as a COVID-19 relief measure, new interest was credited at 7.5% from 14th May 2020 through 31st March 2021).
  • The interest rate if the PAN is not provided is 20%.

The above rates do not include surcharges, education cess, or SHEC. So, the basic tax will be deducted at source.

The time limit for depositing TDS

It is mandatory that tax deducted from April to February be deposited on or before the 7th of the following month. March taxes must be deposited on or before 30th April.

For example, if the taxes are being deducted on April 25, then you should be depositing them by May 7. On the other hand, if taxes are being deducted on March 15, then you should be depositing them by April 30.

Interest for delay in payment of TDS

According to Section 201 of ITA, anyone subject to deducting tax at source who fails to do so, or anyone who fails after deducting the tax to pay it to the credit of the Government, shall be liable to simple interest at the following rate:

  • From the date on which such tax was deductible to the date on which such tax is deducted, interest will be charged at 1% per month or part of a month on the amount of such tax. An interest rate of 1.5% shall be levied on the amount of such tax for each month or a partial month from the date of deducting such tax until the date of paying such tax to the Government. As a result, interest will be charged 1% on delayed deductions and 1.5% on delayed payments after deductions.

An Amendment has been made to Section 201. The Finance Act, 2022 has amended this Section and it now provides that if the Assessing Officer has treated the assessee as a defaulter, then the assessee must pay the interest in accordance with that order. (Note: This will be effective from Assessment Year 2022-23).

TDS return

The government must be informed by any deductor who deducts tax at the source. Details must be supplied in the prescribed manner to the government. The government must receive these details on a quarterly basis. Each deductor is required to submit quarterly TDS returns in the prescribed form detailing the tax deducted by them. A non-government deductor must file a TDS return quarterly on the dates listed below:  

  • April-June: July 31.
  • July-September: October 31.
  • October-December: January 31.
  • January-March: May 31.

Disallowance of expenses while computing business income due to non-deduction of tax at source U/S 194A

Section 40(a)(ia) provides for a 30% disallowance for any sum payable to a resident that is subject to deduction of tax at source when computing income chargeable to tax under the head “Profits and gains of business or profession”. There is no payment of the tax deducted during the year if the payment is not made on or before the due date for filing a return of income under Section 139(1).

As a result, the expenditure will be deductible during the year in which that expenditure is incurred if the tax is deducted during the year and paid on or before the due date for filing the return.

It should be noted, however, that any payment disallowed by the foregoing provision will be allowed as a deduction in computing the income for the year in which the tax has been deducted. Even if the assessee does not deduct the tax at source from a payee’s compensation, no disallowance shall be made if the following conditions are fulfilled:

  • The recipient has submitted his tax return.
  • The income above has been taken into account in such a return.
  • A tax return was filed for the income he declared in the return, and he has paid this tax.
  • In Form No. 26A, the taxpayer obtains a certificate from a Chartered Accountant and provides it to the Income-tax Department electronically. 

In Merilyn Shipping & Transports v. Addl. CIT [2012], the Special Bench stated that the provisions in Section 40(a)(ia) of the Act should apply only to amounts payable at the end of a financial year, and not to amounts that had actually been paid without the deduction of tax at the source during the previous year. The Andhra Pradesh High Court has since suspended (interim suspension) the order of the Special Bench.

In the case of CIT v. Vector Shipping Service (P.) Ltd. [2013], the Allahabad High Court affirmed the decision of the Special Bench in Merilyn Shipping that the amount should be payable rather than paid during the year to be disallowed under Section 40(a)(ia) of the Act. 

Conclusion

According to the ITA, a person’s annual income is subject to taxation if it exceeds their total income. Various methods are available for discharging the tax obligation under the Act, such as TDS, Tax Collected at Source (TCS), advance tax, Self Assessment Tax, and tax on regular assessment. Tax deductibility means that persons making payments of income are required to deduct tax (at specific rates) from such payments and only pay the net amount.

During the applicable period, the deposited tax (called TDS) will be credited to the national treasury. Form 16 or 16A will be issued by the payer to the payee, and the payee will be credited for TDS so that his tax liability is reduced accordingly. Basically, the provisions are merely a means of collecting income taxes and detecting tax evasion through effective control and information. A TDS certificate is generated through the TIN central system and is downloaded from the TIN website that features an individual TDS certificate number for all deductors (including government deductors). 

References

  1. Direct Taxes Ready Reckoner, by Vinod K. Singhania. 
  2. https://www.myadvo.in/blog/section-194a-income-tax-act
  3. https://cleartax.in/s/section-194a-tds-on-interest-other-than-interest-on-securities
  4. https://www.icsi.edu/media/webmodules/FINAL_DIRECTTAXLAW&PRACTICE.PDF
  5. https://www.taxmann.com/bookstore/bookshop/bookfiles/VKS20-06%20sample%20chapter.pdf
  6. https://www.incometaxindia.gov.in/Tutorials/22.%20TDS%20under%20sec%20194A%20etc.pdf

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