Section 193 of the Income Tax Act – TDS on Interest on Securities

Naresh puts his money in securities (₹1,00,000) and he gets an interest. This interest is TDS (Tax Deducted at Source) deducted by the bank under section 193 of the Income Tax Act. This is how it works:

• If interest ≤ ₹5,000: No TDS is deducted.
• If interest > ₹5,000: TDS is deducted at 10%.

Naresh’s Scenario:
 

Key Points:
 

• Section 193 applies to interest from securities (like bonds or debentures).
• TDS is deducted only if interest exceeds ₹5,000 in a year.
• Naresh can claim this TDS while filing his ITR (Income Tax Return).

This rule makes tax to be paid in advance on such incomes.

Importance of Section 193

Instead, Naresh buys government bonds and gets the interest. As per the Provisions of Section 193 of the Income Tax Act, TDS (Tax Deducted at Source) is levied by the bank in case the interest income exceeds a particular amount. The following is why this section is significant:

• Ensures Tax Compliance: The government collects taxes in advance, reducing tax evasion.
• Reduces Burden at Year-End: Since TDS is already cut, Naresh pays less tax while filing his return.
• Applies Only Above Threshold: No TDS if interest is ₹5,000 or below, making small investors worry-free.

Naresh’s Case:
 

Key Importance of Section 193:
 

• To Investors: It facilitates the easy tracking of tax on interest income.
• To Government: It has the advantage that it secures a constant collection of taxes on securities.
• To Banks/Institutions: Advises them on the time of deduction of TDS.

Naresh can avoid last-minute tax surprises and remain in line with the tax laws by adhering to this rule.

Objectives of Section 193

Naresh has fixed deposits and bonds that fetch him an interest of ₹8,000. The bank takes the amount of TDS (Tax Deducted at Source) of ₹800 before paying the interest to him under Section 193 of the Income Tax Act. That is why in this section:

1. Collect Tax in Advance
   • The government gets tax as income is earned, not later.
   • Example: Naresh’s ₹800 TDS goes to the government immediately.
      
2. Reduce Tax Evasion
   • Ensures investors like Naresh cannot hide interest income.
   • Banks automatically deduct tax, making it hard to avoid paying.
      
3. Help Small Investors
   • No TDS if interest is ₹5,000 or less in a year.
   • Example: If Naresh earned ₹4,000, no TDS would be cut.
      
4. Simplify Tax Filing
   • TDS is already paid, so Naresh owes less tax at year-end.
   • He can adjust this TDS against his final tax liability.

Naresh’s TDS Deduction:
 

Key Takeaways:
 

• Encourages honest tax reporting.
• Makes tax collection smoother for the government.
• Protects small investors from unnecessary deductions.

TDS Rate Under Section 193

Naresh deposits ₹3,00,000 with a company at an interest of 9%. He earns an interest of ₹27,000 annually. This is how TDS operates on its investment:

TDS Rules Under Section 193:
 

1. Basic Rule
    
   • 10% TDS on interest from bonds/debentures.
   • Applies only if interest exceeds ₹5,000 yearly.
      
2. PAN Matters
    
   • With PAN: 10% TDS
   • Without PAN: 20% TDS
      
3. Special Cases
    
   • Government securities have different rules.
   • Some tax-free bonds may be exempt.

Naresh's TDS Calculation:
 

Important Points:
 

• TDS takes effect on interests above ₹5,000.
• It is always important to supply PAN to prevent greater deductions.
• To eliminate TDS, you may file Form 15G/15H if a person is entitled to do it.

This is the TDS that Naresh can claim on his tax-paying form.

Exemption Under Section 193

Naresh has invested ₹1,00,000 in government bonds, which earn him an income of 7%. His annual income is through interest of ₹7,000. Under Section 193, banks normally collect 10% TDS (₹700) on this. But in some cases, Naresh can prevent TDS.

Exemptions Under Section 193:
 

1. Small Investors Protection
   • No TDS if the yearly interest is ₹5,000 or less
   • Example: If Naresh earns ₹4,800, no TDS is cut
      
2. Submission of Form 15G/15H
   • If total income is below the taxable limit
   • Naresh (age 45) submits Form 15G to stop TDS
   • Senior citizens (60+) use Form 15H
      
3. Specified Tax-Free Bonds
   • Some government bonds are completely TDS-free.

Naresh's TDS Exemption Options:
 

Key Takeaways:
 

• Submit Form 15G/15H before interest payment to avoid TDS.
   
• Senior citizens get an easier exemption.
   
• Always check the bond type for special TDS rules.

Due Date and Compliance Requirements

In March of the following year, 2024, Naresh gets ₹12,000 interest on bonds. The bank collects the TDS of ₹1,200 as per Section 193. The rules of compliance are the following:

• Due Date for TDS Deposit: The bank must deposit Naresh's ₹1,200 TDS by the 7th of next month (April 7, 2024).
   
• TDS Certificate (Form 16A): The bank must issue Form 16A to Naresh by June 30, 2024, showing the deducted TDS.
   
• Reporting: The bank reports this TDS in their quarterly TDS return (Form 26Q).
   
• Naresh's Action: He checks Form 26AS to verify that the TDS matches his records before filing his tax return.

Failure to meet the deadlines prompts fines for banks.

Practical Examples
 

Naresh spends ₹5,00,000 Indian rupees on investing in corporate bonds with an interest rate of 8% per annum. This is the way Section 193 works on him:

• Interest Calculation: He earns ₹40,000 yearly interest (₹5,00,000 x 8%).
   
• TDS Deduction: Since this exceeds ₹5,000, the company deducts 10% TDS (₹4,000).
   
• PAN Impact: If Naresh didn't provide PAN, 20% TDS (₹8,000) would apply.
   
• Tax Filing: Naresh shows ₹40,000 as income and claims ₹4,000 TDS credit in his return.
   
• Form 15G Option: If his total income is below the taxable limit, he could submit Form 15G to avoid TDS.

This is how Section 193 functions in actual investments.

Conclusion 

This simplification of tax collection can be illustrated by the investments that Naresh made in securities in Section 193. In case he receives ₹50,000 interest on bonds, the bank will collect 10% TDS (₹5,000) as it exceeds the amount of ₹5,000. Such automatic deduction assists Naresh, who has already paid the tax. He has less to pay during the filing. By doing this, through Form 15G, TDS can be avoided in case his total income is small.
 

These rules enable Naresh to remain adherent without incurring extra effort. Under section 193, a fair balance can be represented between low investors (who earn less than ₹5,000) - they do not need to pay, and other investors pay correspondingly. It is a balancing system for Naresh which maintains the taxes transparent and well within control.

FAQs

What is Section 193?
It’s a tax rule where banks/companies deduct 10% TDS on interest from bonds/debentures if it exceeds ₹5,000 in a year.

When is TDS not deducted?
If your yearly interest is ₹5,000 or less, no TDS is cut. Example: ₹4,500 interest = ₹0 TDS.

What if I don’t provide PAN?
TDS increases to 20%. Always share PAN to avoid double deduction.
 

How can I avoid TDS?
Submit Form 15G (if under 60) or Form 15H (if senior citizen) if your total income is below the taxable limit.

Is TDS applicable to tax-free bonds?
Most tax-free bonds don’t attract TDS, but check the bond terms.

When is the TDS deposited with the government?
By the 7th of the next month. Example: TDS cut in March must be paid by April 7.

How do I know TDS was deducted?
Check Form 26AS (available on the Income Tax website) or your Form 16A from the bank.

Can I get a refund if excess TDS is cut?
Yes, claim it while filing your ITR if your total tax due is less than the TDS deducted.

What if the bank forgets to deduct TDS?
You must still report the interest income and pay tax if liable.

Do fixed deposits (FDs) fall under Section 193?
No, FDs fall under Section 194A. Section 193 applies only to securities like bonds/debentures.

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