Understanding Section 194A: TDS on Interest other than Interest on securities

Introduction: Section 194A of the Income Tax Act, 1961, deals with the deduction of Tax Deducted at Source (TDS) on interest payments other than interest on securities. This section is often overlooked, leading to the characterization of the persons involved as neglected. Here are some scenarios related to Section 194A and their implications:

Q1: A firm is paying interest on capital introduced by the partners, is it liable for TDS under Section 194A? Ans: No. Interest on capital introduced by partners is exempted under Section 194A. Therefore, TDS is not applicable in this case.

Q2: A real estate company receives advances from customers and later refunds the advance amount along with some additional amount in case of booking cancellation. Does the company have to deduct TDS on the additional payment under Sec.194A? Ans: No. In this scenario, there is no obligation to deduct TDS under Section 194A. While it’s not mandatory, some may choose to do so to avoid risks.

Explanation:

• The Income Tax Act defines interest as the amount payable for money borrowed or debt incurred.
• The term “debt” is not explicitly defined, and its meaning is inferred from dictionaries, general business practices, or legal precedents.

Example: Suppose a company refunds an advance amount of Rs.100 along with an additional Rs.5 upon cancellation. This additional amount is not considered interest for the amount borrowed or debt incurred but is a compensation for forgoing the right to the Plot or Flat. As it is compensation, Section 194A does not apply.

Q3: An individual borrows from a bank and a friend, paying Rs.50,000 P.M interest to the bank and Rs.45,000 P.M interest to a friend. Does he need to deduct TDS under Sec.194A? Does he need a TAN? Can he use PAN to pay? Ans:

• For interest payment to the bank, TDS is not required as it is exempted under Section 194A.
• For payment to a friend, TDS needs to be deducted under Sec.194A.
• A TAN is required for TDS payment, and PAN cannot be used for this purpose.

Q4: An individual starts a business in 2022-23, paying Rs.50,000 as interest on borrowed funds from friends. Does he have to deduct TDS? Ans: No. Since the individual started the business in the year 2022-23, the turnover in the previous year (2021-22) is assumed to be Nil. Therefore, it is below the limit of Rs.1 Cr and 50 Lac laid down in Section 194A, and TDS is not required.

In conclusion, understanding the nuances of Section 194A is crucial to determine TDS applicability in various scenarios, ensuring compliance with the Income Tax Act.