TDS Under Section 194A: Interest Payments by Businesses Other Than Banks
TL;DR
- Section 194A applies to interest payments other than interest on securities, by anyone other than an individual or HUF below audit limit.
- The TDS rate is 10 percent on interest exceeding Rs. 5,000 in a financial year for non-bank payers and Rs. 40,000 for banks and post offices.
- Senior citizens enjoy a higher threshold of Rs. 50,000 on bank and post-office interest before TDS kicks in.
- Form 15G and 15H allow individuals below taxable limits to receive interest without TDS.
- Interest paid to partners, by co-operatives to members, and on certain notified bonds is exempt from 194A.
What this means in plain terms
If your business pays interest to a lender - whether on a private loan, a debenture, a deposit from a vendor, or even delayed payment compensation - the law treats this as an income for the recipient. Section 194A requires you to deduct 10 percent at source and deposit it with the government.
This is different from interest on listed securities, which is covered by Section 193. Section 194A is about all other interest - the unsecured loan from your supplier, the debenture coupon, the interest on fixed deposits with non-banking finance companies, and so on. Banks deduct under this section too, but with a higher Rs. 40,000 threshold for non-senior citizens.
Scope and exclusions
Payments covered
Interest on unsecured loans from business partners, friends, or third parties, interest on fixed deposits with NBFCs, interest on inter-corporate deposits, and interest on debentures (non-listed) are covered. Interest on delayed payment in commercial transactions also falls within 194A.
Major exclusions
Interest on listed securities (covered by 193), interest paid by a firm to its partners, interest from one co-operative society to another, interest below Rs. 5,000 a year for non-bank payers, and interest credited on the income tax refund are excluded.
Senior citizen relief
Banks deduct TDS only when interest paid to a senior citizen exceeds Rs. 50,000 in a year. Senior citizens earning interest only from one bank can submit Form 15H to avoid TDS even on amounts above this threshold if their total income falls below the taxable limit.
Rates, thresholds and PAN
Threshold by payer type
For banks, co-operative banks, and post offices, the threshold is Rs. 40,000 (Rs. 50,000 for senior citizens). For all other payers - companies, firms, individuals, HUFs covered by tax audit - the threshold is just Rs. 5,000 in a financial year.
Rate
A flat 10 percent applies. Without PAN, the rate becomes 20 percent under Section 206AA. There is no reduced rate by payee category - individual, firm, and company all attract 10 percent.
Form 15G and 15H
A resident individual whose total tax liability for the year is nil can submit Form 15G (under 60) or 15H (60 and above) to the payer. Once accepted, no TDS is deducted even if interest exceeds the threshold. The deductor must still report these payees on TRACES.
Compliance schedule
Time of deduction
Deduct at the earlier of crediting interest in your books (even if to a "payable" account) or actual payment. A common error is booking interest at year-end but not deducting until the payment date - the booking date triggers TDS.
Deposit and return
Deposit by the 7th of the following month using challan ITNS 281. File Form 26Q quarterly on TRACES showing every payee. Issue Form 16A to each interest payee within 15 days of the return due date.
Reporting Form 15G/15H
Forms 15G and 15H received from interest payees must be uploaded to TRACES every quarter, even if no TDS was deducted. Failure to upload is a compliance breach.
A real example
Meera, 44, owns a logistics company in Hyderabad with Rs. 4 crore turnover. She borrowed Rs. 50 lakh from Karthik, a private lender, at 12 percent annual interest in April 2026. Total interest for FY 2026-27: Rs. 6 lakh.
Step 1: The Rs. 6 lakh interest far exceeds the Rs. 5,000 threshold for non-bank payers under 194A.
Step 2: Meera collects Karthik's PAN before the first interest payment in May.
Step 3: She deducts 10 percent of Rs. 50,000 (monthly interest) = Rs. 5,000 and pays Karthik Rs. 45,000.
Step 4: She deposits Rs. 5,000 by 7th June via challan ITNS 281 using her TAN.
Step 5: This repeats every month. By March 2027, total TDS deducted = Rs. 60,000 across 12 months.
Step 6: She files Form 26Q every quarter on TRACES and issues Form 16A to Karthik within 15 days of each filing.
Step 7: Karthik claims the Rs. 60,000 TDS credit when filing his ITR in July 2027.
Total TDS deducted: Rs. 60,000. The interest expense of Rs. 6 lakh remains fully deductible from Meera's business income.
What to do this week
- Identify every interest-bearing liability in your balance sheet - private loans, supplier credits, inter-corporate deposits - and tag whether TDS applies.
- Collect PAN from each lender and verify Form 15G/15H eligibility for any small lenders.
- Reconcile booked interest expenses against challans deposited to surface any missed deductions.
- Set up monthly compliance reminders for 7th-of-the-month TDS deposits and quarterly Form 26Q.
- Run the 6-step assessment at https://myfinancial.in to see your old-vs-new regime delta, unused deductions, and insurance gap in under 10 minutes.
FAQ
Does my business need to deduct TDS on interest paid to a partner?
No. Interest paid by a firm to its own partners is specifically exempted from Section 194A. However, the partner must still report this interest as income in their personal return.
Is TDS applicable on interest on income tax refund received?
No. The Income Tax Department itself does not deduct TDS on refund interest. The recipient reports the interest as income from other sources in their return.
Can I avoid 194A by treating the interest as a discount?
No. The substance of the transaction matters, not the label. If money is borrowed and a time-based charge is paid for the use of money, it is interest regardless of what it is called.
What if the lender is an NBFC?
Interest paid to an NBFC is fully covered by 194A. The NBFC may apply for a lower deduction certificate under Section 197 if their effective tax rate is lower.
Are penal interest and late payment interest covered?
Yes. Any amount that is in the nature of interest, including delayed payment interest under MSME Act provisions, is covered. The legal label is irrelevant.
Can a co-operative society avoid 194A on interest to members?
Yes. Interest paid by a co-operative society to its members is specifically excluded from 194A. Interest paid to non-members or other cooperatives may still attract TDS based on amount.
What is the difference between Section 193 and 194A?
Section 193 covers interest on securities issued by the central or state government and certain corporate debentures. Section 194A covers all other interest - the residual category. Most non-bank payers will encounter 194A more frequently.
Sources
- Income Tax Department, Section 194A: https://incometaxindia.gov.in/
- TRACES portal for deductors: https://www.tdscpc.gov.in/
- Reserve Bank of India on interest reporting: https://rbi.org.in/
- Finance Ministry circulars on TDS: https://finmin.nic.in/
This is general information, not personalised advice. For your situation, consult a Certified Financial Planner.
