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Your bank just deducted tax from your fixed deposit interest and you have no idea why. This is one of the most common tax surprises faced by Indian investors, salaried employees, and senior citizens. The mechanism behind it is 194 A of Income Tax Act, a statutory provision that quietly withholds 10% of your interest income before it ever reaches your account. Understanding section 194A is not just useful — it is financially important. Knowing the exact threshold limits, the applicable rates, and the right forms to submit can put thousands of rupees back in your pocket every year. This guide covers everything: the TDS rate structure, threshold limits updated for FY 2025-26, step-by-step calculation examples, the Form 15G and Form 15H process, all legal exemptions, penalty consequences, and the upcoming transition to the Income Tax Act, 2025.
| Parameter | Details |
|---|---|
| Applicable Section | Section 194A, Income Tax Act, 1961 (Transitioning to Section 393(1), Income Tax Act, 2025 from April 1, 2026) |
| TDS Rate | 10% with valid PAN; 20% without PAN |
| Threshold – Banks / Post Offices (Senior Citizens 60+) | ₹1,00,000 per financial year (FY 2025-26 onwards) |
| Threshold – Banks / Post Offices (Other Individuals) | ₹50,000 per financial year (FY 2025-26 onwards) |
| Threshold – Other Payers (Companies, NBFCs, Firms) | ₹10,000 per financial year (FY 2025-26 onwards) |
| Form to Avoid TDS | Form 15G / Form 15H (Form 121 from April 1, 2026 under new Act) |
| Applicable Payees | Resident Individuals, HUFs, Firms, LLPs, and Companies |
Section 194A of the Income Tax Act, 1961 is a withholding tax provision that makes it mandatory for certain payers to deduct tax at source on interest payments made to resident individuals and entities — but specifically on interest other than interest on securities. The phrase “other than interest on securities” is the defining boundary of this section. Interest on securities — such as government bonds, listed debentures, and public debt instruments — falls under Section 193 of the Act and follows different withholding rules. Section 194A, by contrast, governs the everyday interest income that millions of Indians earn from fixed deposits, recurring deposits, and private loans. To understand what is section 194A of income tax act fully, it also helps to distinguish it from three commonly confused provisions: Section 194 governs TDS on dividend distributions made by domestic companies on equity shares — not interest income at all. Section 194-IA (often referred to as 194 i a of income tax act) mandates a 1% TDS deduction by a buyer when purchasing immovable property valued at ₹50 lakhs or more. This is a property transaction provision, entirely separate from interest income. Section 194JA (a sub-division of Section 194J) prescribes a 2% TDS on fees paid for professional or technical services — again, a completely different category. In plain terms: if a resident taxpayer earns interest from a bank fixed deposit, a corporate deposit with an NBFC, a personal loan extended to a business, or even delayed payment interest on a commercial invoice, TDS under section 194A becomes applicable once the interest crosses the prescribed annual threshold. One important forward-looking development: effective April 1, 2026, the Income Tax Act, 1961 is being replaced by the consolidated Income Tax Act, 2025. Under this new framework, Section 194A is remapped to Section 393(1), where all non-salary TDS provisions are consolidated into a single table-driven structure. The core rates and thresholds remain continuous, but the statutory numbering changes.
The legal obligation to deduct TDS under section 194A does not fall on every interest-paying entity. The law carefully designates specific categories of payers — called deductors — who are personally responsible for calculating, withholding, and depositing the tax.
| Class of Payer | TDS Deduction Requirement | Statutory Basis |
|---|---|---|
| Banking Companies (Public, Private, Foreign) | Mandatory | All branches operating in India |
| Cooperative Societies Engaged in Banking | Mandatory | Those carrying on cooperative banking business |
| National Post Offices | Mandatory | On deposit schemes notified by Central Government |
| Companies and LLPs | Mandatory | Applicable to corporate deposits, inter-company loans, and public deposits |
| Partnership Firms | Mandatory | On third-party commercial loans and unsecured advances |
| Individuals and HUFs | Conditional | Only if subject to tax audit under Section 44AB |
An individual or a Hindu Undivided Family (HUF) is generally exempt from deducting TDS under section 194A — this is the default position. However, this exemption is withdrawn when the individual or HUF crosses the Section 44AB tax audit threshold. This happens when business turnover exceeds ₹1 crore (which may extend to ₹10 crore where at least 95% of receipts and payments are digital) or when professional gross receipts exceed ₹50 lakhs in the immediately preceding financial year. Once these thresholds are crossed, the individual or HUF becomes a mandatory deductor under section 194A for all eligible interest payments they make. A salaried individual paying interest on a home loan to another individual, for instance, is not liable to deduct TDS. But a business owner who crosses the audit threshold and pays interest on a private loan must comply fully.
Section 194A casts a wide net. It covers most forms of interest income that residents earn outside of securities markets, including:
Bank Fixed Deposits (FDs): Interest on standard term deposits, cumulative deposits, and tax-saving FDs (except ELSS) is covered. This is the most common TDS scenario for retail investors.
Recurring Deposits (RDs): Periodic interest credited on systematic RD accounts is equally subject to TDS once the annual threshold is crossed.
Interest on Private Loans and Advances: When a company, firm, or audit-liable individual pays interest on a loan received from another person — whether a friend, relative, director, or business associate — section 194A applies.
Inter-Corporate Deposits: Interest paid by one corporate entity to another on surplus fund deposits or short-term placements falls under this section.
NBFC Deposits: Interest paid on corporate fixed deposits held with Non-Banking Financial Companies is covered under section 194A.
Delayed Payment Interest (Penal Interest): Interest paid in commercial transactions due to delayed settlement of invoices is treated as “interest” under Section 2(28A) of the Act. This means firms that charge or pay interest for late invoice payments must account for TDS under section 194A — a compliance point that is frequently missed in practice.
Court Compensation Interest: Under the Income Tax Act, 1961, interest on Motor Accident Claims Tribunal (MACT) awards was exempt up to ₹50,000. Under the Income Tax Act, 2025 (effective April 1, 2026), interest on MACT compensation paid to a natural person is fully exempt from both income tax and TDS — removing the ₹50,000 ceiling entirely.
Two important exclusions deserve specific mention: interest earned on a standard savings bank account is completely exempt from TDS under section 194A (though it remains taxable income), and interest on income tax refunds is similarly not subject to withholding under this section.
The Finance Act, 2025 introduced significant upward revisions to the TDS threshold limits under section 194A, effective from April 1, 2025. These higher limits are designed to reduce unnecessary tax deductions for small savers, senior citizens, and micro-entrepreneurs.
| Category of Payer | Category of Payee | Threshold (FY 2024-25) | Threshold (FY 2025-26 Onwards) |
|---|---|---|---|
| Banks, Cooperative Societies, Post Offices | Resident Senior Citizens (60+ Years) | ₹50,000 | ₹1,00,000 |
| Banks, Cooperative Societies, Post Offices | Other Resident Individuals and HUFs | ₹40,000 | ₹50,000 |
| Any Other Payer (Companies, NBFCs, Firms, Audit-Liable Individuals) | All Resident Payees | ₹5,000 | ₹10,000 |
A point that most taxpayers misunderstand: the TDS threshold is not calculated per branch but across all branches of the same bank, aggregated under a single PAN. With the integration of Core Banking Solutions (CBS), banks automatically pool all interest credits to every FD, RD, or deposit account linked to one PAN across all their branches. If a taxpayer below 60 years holds three separate fixed deposits of ₹3,00,000 each across three different branches of the same bank at 8% per annum, the annual interest would be ₹24,000 per branch — amounting to ₹72,000 in total. Because ₹72,000 exceeds the ₹50,000 bank-wide threshold, TDS will be deducted on the full ₹72,000, not just the excess. Maintaining deposits across different banks, however, keeps each bank’s threshold independent — a legal and commonly used planning approach.
The withholding tax rate under section 194A is straightforward, but it shifts significantly based on one factor: whether the payee has furnished a valid PAN.
| Scenario | Applicable TDS Rate |
|---|---|
| Valid PAN provided by the payee | 10% |
| PAN not provided or invalid (Section 206AA applies) | 20% |
| Valid Form 15G or Form 15H submitted | NIL |
| Lower or NIL deduction certificate obtained under Section 197 | As specified in the certificate |
| Non-resident payee | Section 195 applies — Section 194A does not |
Two aspects of this rate structure deserve attention. First, there is no surcharge, health and education cess, or any other additional levy on TDS rates under section 194A when payments are made to domestic residents. The rate is flat — 10% is 10%, not 10.4% or any higher effective rate. Second, the 20% penalty rate under Section 206AA applies even if the payee submits Form 15G or Form 15H without a valid PAN. In that scenario, the self-declaration is treated as legally invalid and the higher rate is enforced regardless.
Mr. Ravi, aged 35, holds fixed deposits totalling ₹8,00,000 at State Bank of India at an annual interest rate of 8%.
Annual interest = ₹8,00,000 × 8% = ₹64,000
Applicable threshold for non-senior citizens (banking payer) in FY 2025-26 = ₹50,000
Since ₹64,000 exceeds ₹50,000, TDS is applicable. Importantly, TDS is deducted on the entire interest amount, not just the portion exceeding the threshold.
TDS = 10% × ₹64,000 = ₹6,400
Net interest received by Ravi = ₹64,000 − ₹6,400 = ₹57,600
Mrs. Sunita, aged 65, earns ₹90,000 as annual interest from cumulative bank fixed deposits.
Applicable threshold for senior citizens (banking payer) in FY 2025-26 = ₹1,00,000
Since ₹90,000 is below ₹1,00,000, TDS is not applicable.
TDS deducted = NIL
Mrs. Sunita receives the full ₹90,000, though she must still declare this income under “Income from Other Sources” in her ITR.
ABC Pvt Ltd pays ₹15,000 as annual interest on a loan borrowed from Mr. Amit, who provides a valid PAN.
Applicable threshold for non-banking payers in FY 2025-26 = ₹10,000
Since ₹15,000 exceeds ₹10,000, TDS applies on the full ₹15,000.
TDS = 10% × ₹15,000 = ₹1,500
Net amount paid to Mr. Amit = ₹15,000 − ₹1,500 = ₹13,500
Same parameters as Example 3, but Mr. Amit fails to provide his PAN to ABC Pvt Ltd.
The rate doubles to 20% under Section 206AA.
TDS = 20% × ₹15,000 = ₹3,000
Net amount paid to Mr. Amit = ₹15,000 − ₹3,000 = ₹12,000
The difference between providing and not providing PAN is ₹1,500 in additional TDS on a single ₹15,000 payment. On larger loan amounts, this penalty effect becomes substantial.
Under section 194A, the obligation to deduct tax arises at whichever of the following two events occurs first: The time of credit of interest to the payee’s account in the books of the deductor — this includes credit to any account, regardless of whether it is labelled “Interest Payable Account,” “Suspense Account,” or any similar ledger head. The time of actual payment of interest in cash, by cheque, by bank transfer, or by any other mode. This timing rule has a practical implication that catches many businesses off-guard. A company that accrues and credits loan interest to a lender’s account at the end of the financial year (March 31) but physically transfers the money only in May must deduct and deposit TDS based on the March credit entry — not the May payment date. For banks, this means TDS must be deducted at each quarterly interval when interest is credited to cumulative fixed deposits, even though the depositor does not receive any physical payout until maturity.
Section 194A(3) provides a statutory list of situations where tax deduction at source is not required, regardless of the interest amount involved.
Payments to Banking Institutions: Interest paid or credited to any banking company or cooperative society engaged in banking is exempt. Banks paying interest to other banks do not deduct TDS.
Payments to Public Financial Institutions: Interest paid to the Life Insurance Corporation of India (LIC), the Unit Trust of India (UTI), or Central Government-notified public insurance companies is exempt.
Payments to the Central or State Government: Direct interest credits to government entities require no TDS.
Interest Below Threshold Limits: As detailed in the threshold table above — ₹50,000 for banks (non-senior citizens), ₹1,00,000 for banks (senior citizens), and ₹10,000 for other payers in FY 2025-26.
Motor Accident Claims Tribunal Awards: Under the 1961 Act, interest on MACT compensation was exempt only up to ₹50,000. Effective April 1, 2026, the Income Tax Act, 2025 makes this exemption unlimited for natural persons — all MACT interest is fully exempt.
Valid Form 15G or Form 15H Submission: When a qualifying resident submits a valid self-declaration confirming zero net tax liability.
Payments to the Reserve Bank of India: Interest paid directly to the RBI carries no TDS obligation.
Interest Under Section 194LC: Interest paid by Indian companies to non-residents on certain approved foreign borrowings follows the concessional TDS rules under Section 194LC and is exempt from section 194A.
Partnership Firm to Partners — Important Change from April 2025: Historically, under Section 194A(3)(iv), interest paid by a partnership firm to its partners was fully exempt from TDS. This changed with the Finance Act, 2024. Effective April 1, 2025, a new Section 194T requires partnership firms to deduct 10% TDS on salary, interest, commission, bonus, or remuneration paid to partners if the aggregate exceeds ₹20,000 in the financial year. The exemption under Section 194A(3)(iv) effectively no longer applies for partner interest — it has migrated to Section 194T.
If a resident taxpayer’s total annual income is below the basic exemption limit and their net tax liability for the year is NIL, they can submit a self-declaration to the interest-paying institution, requesting that no TDS be deducted.
| Feature | Form 15G | Form 15H |
|---|---|---|
| Who can submit | Resident Individuals Below 60 Years; HUFs | Resident Senior Citizens Aged 60 Years or Above |
| Estimated Tax Liability Condition | Must Be NIL for the Financial Year | Must Be NIL for the Financial Year |
| Gross Income Condition | Aggregate Interest Income Must Not Exceed the Basic Exemption Limit | No Condition on Gross Income — Net Tax Liability Must Be NIL |
| Applicable to HUFs | Yes | No |
| Validity | One Financial Year; Must Be Renewed Annually | One Financial Year; Must Be Renewed Annually |
which you receive interest income. Once submitted, the bank or institution is legally prohibited from deducting TDS on your interest for that year.
Submitting Form 15G or Form 15H when your income is actually above the exemption limit or your tax liability is not zero is a criminal offense under Section 277 of the Income Tax Act. For amounts where the tax evaded exceeds ₹25 lakhs, punishment includes rigorous imprisonment from 6 months to 7 years plus a fine. For smaller amounts, imprisonment ranges from 3 months to 2 years, plus a fine.
Under the Income Tax Act, 2025, both Form 15G and Form 15H are replaced by a single unified declaration called Form 121, effective April 1, 2026. Form 121 consolidates the self-declaration process for all resident taxpayers regardless of age. It can be used to request NIL TDS on interest, dividends, and rent in a single submission. The key change for senior citizens: under Form 121, they must satisfy the same condition as other individuals — their total income must fall below the basic exemption limit (₹4,00,000 under the default new tax regime). The earlier relaxation under Form 15H that allowed senior citizens to submit a declaration even when gross income exceeded the exemption limit (provided deductions brought net tax to zero) has been removed.
When a taxpayer does not qualify for Form 15G or Form 15H — perhaps because their income marginally exceeds the exemption limit — they can apply to their Assessing Officer (AO) for a lower or NIL TDS certificate under Section 197. The application is made online through Form 13 on the TRACES portal. The AO reviews the taxpayer’s estimated income for the year, their tax filing history, and any outstanding tax dues. If satisfied, the AO issues a certificate specifying a reduced TDS rate or NIL deduction. The deductor must honor this certificate from the date of its issuance — it cannot be applied retroactively, and it is valid only for the financial year and period stated on the certificate.
Once TDS is deducted, the deductor must transfer the withheld amount to the Central Government’s account within prescribed timelines.
| Deduction Period | Deposit Due Date |
|---|---|
| Tax deducted from April to February | 7th of the following month |
| Tax deducted in March | 30th April of the same year |
| Government deductors (payment without challan) | Same day as the deduction |
| Government deductors (payment with ITNS 281 challan) | 7th of the following month |
Missing these deadlines triggers interest under Section 201(1A), calculated at 1.5% per month from the date of deduction to the actual date of deposit.
Under the Income Tax Act, 1961, all non-salary TDS deductions — including those under section 194A — are reported quarterly in Form 26Q. Starting from the first quarter of FY 2026-27 (transactions from April 1, 2026 onwards), Form 26Q is replaced by Form 140 under the Income Tax Act, 2025.
Section 44AD is a presumptive taxation provision that allows eligible small businesses to declare income at fixed prescribed rates without maintaining detailed books of accounts.
Resident individuals, HUFs, and partnership firms engaged in eligible businesses can opt for Section 44AD.
The standard turnover limit is ₹2 crore. However, businesses with mostly digital transactions may qualify for the enhanced ₹3 crore limit.
No. Professionals covered under Section 44ADA cannot opt for Section 44AD.
Not usually. However, audit may become mandatory if income is declared below presumptive rates while exceeding exemption limits.
Digital receipts are taxed at 6% presumptive income, while cash receipts are taxed at 8%.
No. LLPs are not eligible under Section 44AD.
Eligible taxpayers generally file ITR-4 under presumptive taxation.
Section 44AD remains one of the most useful tax compliance provisions for small businesses in India. It simplifies taxation, reduces audit burden, and encourages easier compliance for eligible taxpayers. However, businesses should not treat presumptive taxation as a shortcut without understanding its long-term implications. With increasing digital scrutiny, AI-based monitoring systems, and transaction-level verification, accurate reporting under Section 44AD has become more important than ever. Businesses should carefully evaluate turnover structure, digital transactions, audit risks, and future growth plans before opting into presumptive taxation.
If you are unsure whether Section 44AD is suitable for your business, AVC’s tax professionals can help you evaluate eligibility, calculate presumptive income correctly, avoid audit risks, and file your ITR accurately under the Income Tax Act.