Tax Deducted at Source (TDS) is a method of collecting income tax in India. Under this system, tax is deducted at the point of origin of the income. For instance, when a payment such as salary, commission, or interest is made, a certain percentage is deducted and paid directly to the government. This system ensures a continuous inflow of revenue to the government and helps in minimizing tax evasion.

Section 193 of the Income Tax Act, 1961, specifically deals with the TDS on interest on securities. This provision mandates that any person responsible for paying interest on securities must deduct tax at the source from the payment made to the payee. Securities under this section include debentures, bonds, and other similar financial instruments issued by corporations, government bodies, or local authorities.

This article aims to provide a comprehensive understanding of TDS on interest on securities under Section 193. Whether you are a taxpayer receiving interest income, a company issuing securities, or a tax professional assisting clients with compliance, this guide will help you navigate the complexities of TDS on interest on securities. By the end of this article, you will have a clear understanding of Who is liable to deduct TDS on interest on securities. How to calculate and deduct TDS under Section 193.Compliance requirements including filing returns and issuing TDS certificates. Recent updates and amendments to the section.

Understanding Section 193

Section 193 of the Income Tax Act, 1961, pertains to the deduction of tax at source (TDS) on interest on securities. This section mandates that any person responsible for paying interest on securities must deduct tax at the source before making the payment to the payee. The key aspects of Section 193 are as follows:

Key Aspects of Section 193:

Section 193 applies to any person responsible for paying interest on securities. This includes companies, government bodies, local authorities, and financial institutions.

Types of Securities:

• Government Securities: Interest on securities issued by the central or state government.
• Debentures: Interest on debentures issued by companies, whether listed or unlisted.
• Bonds: Interest on bonds issued by companies, government bodies, or financial institutions.
• Local Authority Securities: Interest on any securities issued by local authorities or statutory corporations.

When to Deduct TDS:

TDS must be deducted at the time of crediting the interest to the account of the payee or at the time of payment, whichever is earlier.

Rate of TDS:

The rate of TDS on interest on securities is typically 10%, but this rate can vary based on specific conditions or changes in tax laws.

Threshold Limit:

Certain exemptions and threshold limits may apply. For example, no TDS is required if the interest payable does not exceed a specified limit set by the tax authorities.

Exemptions:

Interest payable to certain entities or under certain conditions may be exempt from TDS under Section 193. For instance, interest payable to Life Insurance Corporation (LIC), General Insurance Corporation (GIC), or other insurers is exempt from TDS.

Importance of Section 193:

Section 193 ensures that tax is collected upfront on interest income, promoting timely and efficient tax compliance. By mandating the deduction of TDS on interest on securities, this section helps in minimizing tax evasion and ensures a steady flow of revenue to the government.

Practical Implications:

Entities paying interest on securities need to comply with Section 193 by:

• Deducting the appropriate amount of TDS.
• Depositing the deducted tax with the government within the prescribed time frame.
• Issuing TDS certificates to the payees, detailing the interest paid and the TDS deducted.
• Filing quarterly TDS returns to report the deducted TDS.

By adhering to these requirements, both payers and payees can ensure compliance with the tax laws and avoid potential penalties and interest charges for non-compliance.

Who is Liable

Under Section 193 of the Income Tax Act, 1961, any person or entity responsible for paying interest on securities is required to deduct TDS. Typically, the following entities are liable to deduct TDS under this section:

• Companies: Corporations that issue securities such as debentures and bonds and pay interest on these instruments.
• Government Bodies: Entities like the central and state governments that issue government securities.
• Local Authorities: Municipalities and other local government bodies that issue bonds or other debt instruments.
• Financial Institutions: Banks and other financial institutions that issue bonds or similar securities.
• Public Sector Undertakings (PSUs): Government-owned corporations that issue securities.

These entities are required to deduct TDS at the time of crediting the interest to the account of the payee or at the time of payment, whichever is earlier.

Rate of TDS under Section 193

Standard Rate

The standard rate of Tax Deducted at Source (TDS) under Section 193 of the Income Tax Act, 1961, is 10%. This rate is applied to the interest paid on securities, such as debentures, bonds, and government securities.

Exceptions and Variations

While the standard rate of TDS on interest on securities is 10%, there are certain exceptions and variations based on specific circumstances or types of payees:

Interest Payable to Resident Individuals and Entities:

The standard rate of 10% is applicable for interest payable to resident individuals, Hindu Undivided Families (HUFs), firms, and companies.

Interest Payable to Non-Residents:

For non-residents, the rate of TDS can vary based on the provisions of Section 195 and applicable Double Taxation Avoidance Agreements (DTAAs). The rate can range from 10% to 30%, or as per the DTAA, whichever is beneficial to the non-resident.

Interest Payable to Certain Entities:

• Life Insurance Corporation (LIC), General Insurance Corporation (GIC), and Other Insurers: No TDS is required on interest payable to these entities.
• Interest Payable to Banking Companies, Financial Corporations, or Institutions Notified by the Central Government: These entities are generally exempt from TDS on interest on securities.
• Public Provident Fund (PPF): No TDS is required on interest paid on PPF accounts.

Threshold Limits:

Interest payments below a specified threshold limit are exempt from TDS. For example, no TDS is required if the interest payable on debentures by a company to a resident individual does not exceed ₹5,000 in a financial year, provided the interest is paid by an account payee cheque.

Special Securities:

Zero-Coupon Bonds: No TDS is applicable on the discount accrued on zero-coupon bonds as they do not pay periodic interest.

Interest Payable to Government and Other Notified Entities:

Interest payable to any government, including state governments and other notified entities, may be exempt from TDS under specific notifications issued by the government.

Practical Implications

Entities responsible for paying interest on securities must:

• Determine the applicable TDS rate: Based on the type of payee and the nature of the security.
• Apply exemptions where applicable: Ensure that no TDS is deducted for exempt entities or below threshold limits.
• Comply with varying rates for non-residents: Verify the applicable TDS rate as per Section 195 and relevant DTAAs for interest payments to non-residents.

Threshold Limit for TDS Deduction

Exemption Limit

Under Section 193 of the Income Tax Act, 1961, there are specific threshold limits below which TDS is not required to be deducted on interest payments. The key threshold limits are as follows:

Interest on Debentures:

No TDS is required if the interest payable on debentures issued by a company to a resident individual does not exceed ₹5,000 in a financial year. This exemption is applicable only if the interest is paid by an account payee cheque.

Interest on Securities Issued by Certain Institutions:

No TDS is required on interest payable on securities issued by the following institutions, regardless of the amount:

• Life Insurance Corporation (LIC)
• General Insurance Corporation (GIC)
• Any other insurer

Interest on Government Securities:

No specific threshold limit is provided for government securities. TDS is typically deducted on all interest payments on government securities unless exempted under specific provisions.

Interest Paid to Specific Entities:

• No TDS is required on interest payable to the following entities, irrespective of the amount:
• Banking companies
• Financial corporations established by or under a Central, State, or Provincial Act
• Any institution or association notified by the Central Government

Application of Threshold

The application of the threshold limit for TDS deduction under Section 193 is subject to specific conditions:

Interest on Debentures:

• The threshold limit of ₹5,000 applies only if the interest is paid to a resident individual by a company on its debentures.
• The payment must be made through an account payee cheque to qualify for the exemption.

Aggregation of Interest:

The threshold limit is considered for each security separately. Therefore, if an individual holds multiple debentures or securities, the interest on each security is evaluated independently to determine if it exceeds the threshold limit.

However, if the cumulative interest on multiple securities issued by the same issuer exceeds the threshold limit, TDS is applicable on the total interest amount.

Entities with Exemptions:

For entities such as LIC, GIC, and other insurers, the exemption from TDS applies to all interest payments, regardless of the amount.

Similar exemptions apply to banking companies, financial corporations, and other notified institutions.

Compliance Requirements:

Entities responsible for making interest payments must ensure compliance with the threshold limits and exemptions. They must verify the eligibility of the payee for exemption before deciding not to deduct TDS.

Proper documentation and records must be maintained to support the application of exemptions and threshold limits.

Procedure for TDS Deduction under Section 193

Timing of Deduction

The timing of TDS deduction under Section 193 of the Income Tax Act, 1961, is crucial to ensure compliance with the law. TDS on interest on securities should be deducted at either of the following times, whichever is earlier:

• At the time of credit of such interest to the account of the payee: This includes credit to any account, whether it is called an interest payable account, suspense account, or by any other name.
• At the time of payment of such interest in cash, by the issue of a cheque, draft, or by any other mode: This means the actual disbursement of the interest amount.
• This ensures that tax is deducted at the earliest point when the interest income becomes due to the payee.

Calculation of TDS

The calculation of TDS on interest on securities involves the following steps:

Determine the Total Interest Payable:

Identify the total interest amount payable to the payee for the financial year. This includes all interest accrued and due on the securities held by the payee.

Check the Applicability of Threshold Limits:

Verify if the total interest payable exceeds the specified threshold limits for TDS deduction. For instance, if the interest on debentures payable to a resident individual does not exceed ₹5,000 in a financial year, no TDS is required.

Apply the Standard Rate of TDS:

• If the interest amount exceeds the threshold limit, apply the standard TDS rate of 10% on the total interest payable.
• For non-residents, check the applicable TDS rate under Section 195 and relevant Double Taxation Avoidance Agreements (DTAAs).

Consider Exemptions:

• Determine if the payee is eligible for any exemptions from TDS. For example, interest payable to LIC, GIC, and other insurers is exempt from TDS under Section 193.
• Ensure that the interest payable to specific entities such as banks, financial corporations, and notified institutions is exempt from TDS.

Calculate the TDS Amount:

Multiply the total interest payable by the applicable TDS rate to arrive at the TDS amount.

TDS Amount=Total Interest Payable×Applicable TDS Rate

Deduct and Deposit TDS:

• Deduct the calculated TDS amount from the interest payable to the payee.
• Deposit the deducted TDS with the government within the prescribed time frame. Typically, TDS must be deposited by the 7th of the following month in which the deduction is made. For March, the deadline is extended to April 30th.

Issue TDS Certificates:

After deducting and depositing the TDS, issue a TDS certificate (Form 16A) to the payee. This certificate details the interest paid and the TDS deducted and deposited with the government.

File Quarterly TDS Returns:

File quarterly TDS returns in Form 26Q, providing details of the interest paid, TDS deducted, and other relevant information. The due dates for filing quarterly TDS returns are:

• April to June: 31st July
• July to September: 31st October
• October to December: 31st January
• January to March: 31st May

By following this procedure, entities can ensure accurate and timely compliance with the TDS provisions under Section 193, thereby avoiding penalties and interest charges for non-compliance.

Compliance Requirements

Filing and Payment

Deposit of TDS:

• The deducted TDS must be deposited with the government within the prescribed time frame. Generally, TDS should be deposited by the 7th of the following month in which the deduction is made.
• For the month of March, the deadline for depositing TDS is extended to April 30th.
• The payment can be made through electronic means using the designated banks or online through the government tax payment portal.

Challan for TDS Payment:

• Use Challan ITNS 281 for depositing TDS.
• Ensure the correct details are filled in the challan, including the TAN (Tax Deduction and Collection Account Number), assessment year, and amount of TDS.

Issuance of TDS Certificate

Form 16A:

• After depositing the TDS with the government, the deductor is required to issue a TDS certificate, Form 16A, to the payee.
• Form 16A details the amount of interest paid and the TDS deducted and deposited.
• The certificate must be issued on a quarterly basis and within 15 days from the due date for filing the TDS return for the respective quarter.

Quarterly Returns

Form 26Q: Deductors must file quarterly TDS returns using Form 26Q, providing details of all the TDS deductions made on interest on securities.

The due dates for filing quarterly TDS returns are as follows:

• For the April to June quarter: 31st July
• For the July to September quarter: 31st October
• For the October to December quarter: 31st January
• For the January to March quarter: 31st May

Ensure that the return is accurately filled with all relevant details, including the amount of interest paid, TDS deducted, and the PAN details of the payees.

Consequences of Non-compliance

Penalties for Non-deduction

Failure to Deduct TDS:

• If a deductor fails to deduct TDS on interest on securities as required under Section 193, the entire amount of tax that was required to be deducted can be disallowed as an expense under Section 40(a)(ia) while computing the taxable income of the deductor.
• The deductor will also be treated as an assessee-in-default under Section 201, making them liable to pay the tax that should have been deducted.

Penalty under Section 271C:

A penalty equal to the amount of TDS not deducted or not paid may be levied under Section 271C. This is in addition to the tax that is to be paid.

Interest and Penalties

Interest for Late Deduction or Non-deduction:

If TDS is not deducted on time, interest will be charged at the rate of 1% per month or part of a month from the date the tax was deductible until the date it is actually deducted.

Interest for Late Payment of TDS:

If the deducted TDS is not deposited on time, interest will be charged at the rate of 1.5% per month or part of a month from the date of deduction to the date of payment.

Penalty under Section 234E:

A penalty of ₹200 per day is levied for each day the TDS return is not filed within the due date under Section 234E. The total penalty cannot exceed the amount of TDS deductible for that quarter.

Prosecution under Section 276B:

In cases of willful failure to deduct TDS, pay TDS to the government, or furnish returns/statements, prosecution under Section 276B can result in rigorous imprisonment for a term ranging from 3 months to 7 years along with a fine.

Recent Updates and Amendments

Legislative Changes

Union Budget 2023-24:

Any specific changes or updates to Section 193 announced in the latest Union Budget would be noted here. For example, adjustments to threshold limits, changes in TDS rates, or amendments to the list of exemptions might have been made.

Circulars and Notifications by the CBDT:

The Central Board of Direct Taxes (CBDT) issues circulars and notifications that provide clarifications and updates regarding TDS provisions. Recent circulars might include changes in procedural aspects or interpretative guidelines.

Impact of Amendments

Impact on Taxpayers:

• Changes in threshold limits or TDS rates directly affect the amount of tax deducted and compliance requirements for taxpayers receiving interest income.
• New exemptions or inclusions can alter the tax liability and the need for documentation and compliance.

Impact on Entities Responsible for Deducting TDS:

• Amendments may require changes in the systems and processes used by entities to deduct and deposit TDS. This could include updates to software, training for staff, and adjustments to accounting practices.
• Non-compliance risks may increase with changes, necessitating closer attention to legislative updates and timely implementation of new rules.       

Examples and Illustrations

TDS on Debentures of a Company

ABC Ltd. pays interest of ₹7,000 on debentures to Mr. Raj, a resident individual, for the financial year.

Since the interest amount exceeds the threshold limit of ₹5,000, ABC Ltd. is required to deduct TDS.

TDS at 10% is deducted on ₹7,000.

TDS Amount: ₹7,000 * 10% = ₹700.

ABC Ltd. credits ₹6,300 to Mr. Raj's account and deposits ₹700 with the government.

Interest on Government Securities

The Central Government pays ₹10,000 as interest on government securities to Mr. Sunil, a resident individual.

There is no threshold limit for interest on government securities.

TDS at 10% is deducted on ₹10,000.

TDS Amount: ₹10,000 * 10% = ₹1,000.

The government credits ₹9,000 to Mr. Sunil's account and deposits ₹1,000 with the government.

Exempt Interest on Securities

LIC receives ₹50,000 as interest on securities issued by XYZ Corporation.

LIC is exempt from TDS on interest under Section 193.

XYZ Corporation pays the full ₹50,000 to LIC without any TDS deduction.

Comparative Analysis

Section 193 vs. Section 194A (TDS on Interest Other than Interest on Securities)

Section 193: Applies to interest on securities such as government securities, debentures, and bonds.

Section 194A: Applies to interest other than interest on securities, such as interest on bank deposits and loans.

Threshold Limits:

Section 193: Specific threshold limits for certain types of securities (e.g., ₹5,000 for debentures).

Section 194A: Threshold limit of ₹40,000 (₹50,000 for senior citizens) for interest on bank deposits.

Rate of TDS:

Section 193: Standard rate of 10% for residents.

Section 194A: Standard rate of 10% for residents.

Exemptions:

Section 193: Exemptions for interest paid to LIC, GIC, banks, and certain notified institutions.

Section 194A: Exemptions for interest paid by co-operative societies, certain notified institutions, and banks on specified accounts.

Conclusion

In this article, we explored the provisions of Section 193 of the Income Tax Act, 1961, which governs the deduction of tax at source (TDS) on interest on securities. Key points discussed include:

Compliance with TDS provisions is crucial for both payers and payees. For payers, it ensures adherence to tax laws, avoiding penalties and interest charges. For payees, proper TDS deduction and documentation allow for accurate tax credits and refunds.

Looking ahead, we can expect further digitalization and automation in TDS processes, making compliance more efficient. Additionally, any changes in tax rates or thresholds announced in future budgets will impact the application of Section 193. Staying informed about legislative updates and leveraging technology will be key to maintaining compliance with TDS provisions on interest on securities.

By understanding and adhering to these provisions, entities can ensure seamless compliance, thereby contributing to a more efficient tax administration system in India.