TDS on Interest Income: Section 193 of the Income Tax Act

The Indian Income Tax Act functions as a roadmap for tax regulations, encompassing diverse income sources and their associated tax liabilities. Section 193 carves out a specific niche within this framework, dealing with Tax Deducted at Source (TDS) on interest earned from securities. This article delves deeper into this section, elucidating who needs to comply with it, the applicable rates and deadlines, exemptions, and a recent amendment impacting its scope.

What is TDS under Section 193?

Section 193 mandates that any entity disbursing interest on securities to a resident Indian taxpayer must act as a tax collector at the source. In simpler terms, before crediting the interest amount to the taxpayer's account, a portion of the tax liability is deducted upfront. This mechanism streamlines tax collection and ensures some tax is paid throughout the year.

Who Needs to Deduct TDS under Section 193?

The responsibility to deduct TDS under Section 193 falls on the entity disbursing the interest on securities. This could include:

• Banks and financial institutions
• Companies issuing debentures
• Government bodies issuing bonds

TDS Rate under Section 193

The standard TDS rate applicable under Section 193 is 10%. This rate applies unless the taxpayer furnishes a valid Permanent Account Number (PAN) or a lower deduction certificate (Form 15G/15H) is submitted, indicating their eligibility for a reduced or nil TDS rate.

Timing of TDS Deduction

The TDS deduction needs to be made at the earliest of two instances:

• When the interest income is credited to the taxpayer's account (through cash, cheque, or any other mode).
• When the actual payment of the interest income is made.

Due Dates for Depositing TDS

The deducted TDS amount must be deposited with the government by the following due dates:

• For interest income credited in March: by April 30th of the same year.
• For interest income credited in any month other than March: by the 7th day following the month-end.

TDS under Section 193 Exemptions

There are certain scenarios where TDS under Section 193 is not applicable. These exemptions include:

• Interest income up to INR 5,000 on debentures issued by a listed company, provided the payment is made through an account payee cheque.
• Interest income up to INR 10,000 on specific government bonds like 8% Savings (Taxable) Bonds.
• Interest on certain specified instruments like National Defence Bonds (interest rate 4.25%), National Savings Certificates (interest rate varies), and specific gold bonds issued by the government.
• Interest paid on dematerialized securities listed on recognized stock exchanges, issued by companies with significant public participation (up to INR 5,000 on account payee cheque).
• Interest income up to INR 10,000 on overdue past-due bonds issued by the central or state government.
• Interest income on certain registered debentures issued by specific institutions.
• Interest income received by specific businesses or insurers covered under relevant Acts.

Section 193 (Budget 2023) Recent Amendment

In a major change brought about by the 2023 Budget, a loophole in Section 193 has been plugged. Prior to this amendment, interest income earned on dematerialized securities listed on recognized exchanges enjoyed a tax exemption. This clause has been eliminated. Consequently, effective from April 1, 2023, a 10% TDS will be levied on interest earned from listed Non-Convertible Debentures (NCDs) as well.

Conclusion

Understanding Section 193 of the Income Tax Act is crucial for both taxpayers and entities disbursing interest on securities. By following the guidelines for TDS deduction, both parties can ensure proper tax compliance and avoid any potential penalties. Always consult a tax advisor, if you have any doubts regarding your specific situation or eligibility for exemptions.