Section 194A — TDS on Interest Income: Complete Guide FY 2025-26

Section 194A of the Income Tax Act, 1961, mandates Tax Deducted at Source (TDS) on interest income other than interest on securities. It covers interest paid or credited by banks, cooperative societies, post offices, NBFCs, companies, LIC, and any other person on loans, fixed deposits, recurring deposits, or any other borrowing arrangement. The deductor (entity paying interest) must deduct TDS before paying the interest to the recipient. Individuals and Hindu Undivided Families (HUFs) are also required to deduct TDS under 194A if their accounts are subject to tax audit under Section 44AB in the preceding financial year. Section 194A does not apply to interest on securities (which is covered by Section 193), interest paid to a partner by a firm on capital or current account (explicitly excluded), interest on loan against securities (LAS) in some cases, and interest on savings bank accounts (this falls under Section 194A technically, but the threshold and common practice depends on the total interest paid). The deductor must deposit the TDS to the government and issue Form 16A to the deductee within the prescribed timelines.

The TDS rate under Section 194A is 10% when the recipient has furnished a valid PAN. If PAN is not provided, TDS is deducted at 20% (or the rate in force, whichever is higher) under Section 206AA. From FY 2025-26, threshold limits for TDS deduction under 194A are as follows: For banks (scheduled and cooperative), banking companies, and post offices — TDS is deducted only if the aggregate interest paid or credited in a financial year exceeds ₹40,000 for regular individuals. For senior citizens aged 60 years and above, this threshold is ₹50,000 per year. For all other interest payments (inter-corporate deposits, NBFCs not being banks, companies paying interest to individuals, etc.) — the threshold is ₹5,000 per year. Importantly, for banking institutions, the threshold is applied on the aggregate of all FD/RD interest across all branches of the same bank. If the total interest across all branches of Bank X exceeds ₹40,000 in a year, TDS applies on the entire amount — not just the excess. Banks are required to aggregate interest at the PAN level across all CBS-linked branches.

Form 15G and Form 15H are self-declaration forms submitted by the depositor to the payer (bank, NBFC, etc.) to request nil TDS deduction, provided the depositor's total income for the year is below the taxable threshold. Form 15G is for individuals below 60 years of age and HUFs whose estimated total income for the year is nil or below the basic exemption limit of ₹2,50,000 (old regime) or ₹3,00,000 (new regime). Additionally, the total interest income from all sources must not exceed the basic exemption limit. Form 15H is for senior citizens (60 years and above) and only requires that their total estimated tax liability for the year is nil — there is no separate condition that interest income must be below a threshold. This makes 15H easier to qualify for than 15G. Both forms must be submitted at the beginning of each financial year (ideally in April) to each branch/institution where deposits are held. If submitted after TDS has already been deducted, the TDS cannot be reversed — the depositor must claim refund by filing ITR. These declarations do not mean income is tax-free; they only prevent deduction at source. The income must still be declared in ITR.

Section 194A technically covers "interest other than interest on securities," and savings account interest falls under this broad definition. However, in practice, most banks do not deduct TDS on savings account interest because the threshold of ₹40,000 (₹50,000 for senior citizens) in aggregate interest from the same bank is usually not breached on savings accounts alone. The threshold under 194A applies to the aggregate of all interest paid by the bank to the customer in the financial year — this includes FD interest, RD interest, and savings account interest combined. If the combined interest exceeds ₹40,000, TDS is deducted on the total. Savings account interest below this threshold is not subject to TDS. For tax purposes, savings account interest is deductible under Section 80TTA for non-senior citizens (up to ₹10,000) and under Section 80TTB for senior citizens (up to ₹50,000, covering all deposit interest). The recipient must declare savings account interest as "Income from Other Sources" in ITR regardless of whether TDS was deducted, and then claim the applicable deduction. Interest from a savings account in a post office is also covered by 194A.

Failure to deduct or deposit TDS under Section 194A attracts serious consequences under the Income Tax Act. First, the deductor (payer) is treated as an "assessee in default" under Section 201(1) and becomes personally liable to pay the TDS amount along with interest. Interest under Section 201(1A) is levied at 1% per month (or part thereof) from the date TDS was due to be deducted until the date it is actually deducted, and 1.5% per month from the date of deduction to the date of actual deposit. Second, 30% of the interest expense for which TDS was not deducted may be disallowed as a deduction under Section 40(a)(ia) in computing the payer's taxable income — this can significantly increase the payer's own tax liability. Third, a penalty under Section 271C equal to the amount of TDS not deducted can be levied. Fourth, the deductor is required to file TDS returns (Form 26Q for 194A) quarterly, and late filing attracts a fee of ₹200 per day under Section 234E, capped at the TDS amount. Additionally, Section 276B provides for prosecution with rigorous imprisonment for up to seven years in cases of willful failure to deposit TDS with the government.