Understanding Tax Deducted at Source (TDS) on interest from securities is crucial for both individuals and businesses in India. Covered under Section 193 of the Income Tax Act, the provision mandates that anyone paying interest on securities to a resident must deduct tax at the source. From rules and exemptions to compliance requirements, Section 193 plays a vital role in ensuring tax discipline and preventing revenue leakage.
For taxpayers, knowing the nuances of Section 193 is not just about avoiding penalties—it can directly influence investment planning and cash flow management.
Key Highlights
- Section 193 applies to interest on securities, including bonds, debentures, and listed/unlisted securities.
- Standard TDS rate is 10%; if the payee does not furnish a PAN, the maximum marginal rate applies.
- Exemptions include interest up to ₹5,000 on listed company debentures and ₹10,000 on certain government bonds.
- TDS must be deposited by April 30 for March transactions and within 7 days after the month’s end for other months.
Understanding Section 193
Section 193 governs the tax treatment of interest on securities. Over the years, it has undergone multiple amendments to stay relevant with evolving investment products. The flat TDS rate is 10%, though it may vary for non-residents under Double Taxation Avoidance Agreements (DTAAs).
Scope and Application
The provision covers a wide range of instruments, including government bonds, corporate debentures, and listed non-convertible debentures (NCDs). Deductors must withhold tax at the time of credit or payment, whichever comes earlier.
Recent Changes
From April 1, 2023, a 10% TDS applies to interest on listed NCDs. The move aligns tax treatment with other securities and aims to standardise compliance.
Applicable Interest Types
Section 193 applies to:
- Interest on debentures (exempt up to ₹5,000 if paid by cheque)
- Interest on government securities (exempt up to ₹10,000 annually)
- Interest on listed and unlisted securities
TDS Rates and Thresholds
- Debenture interest: 10% TDS, exempt up to ₹5,000
- 8% Savings Bonds or 7.75% Savings Bonds: 10% TDS, exempt up to ₹10,000
- Government securities: No exemption limit unless specifically provided
Exemptions
Certain entities, such as the Life Insurance Corporation (LIC) and the General Insurance Corporation (GIC), are exempt from TDS on any amount of interest received. Some instruments, like the 7-year National Savings Certificate, are also outside TDS ambit.
Compliance for Deductors
- Deposit TDS within 7 days of month-end (April 30 for March)
- File quarterly TDS returns by 31 July, 31 October, 31 January, and 31 May
- Issue TDS certificates within 15 days of return filing deadlines
Penalties for Non-Compliance
Failing to deduct or deposit TDS can attract interest (1–1.5% per month) and penalties. If the payee fails to furnish a PAN, TDS must be deducted at 20% or the applicable higher rate.
Special Rules for NRIs
Non-Resident Indians are subject to TDS on interest under Section 193 but may benefit from reduced rates under DTAAs. Residency status, DTAA provisions, and repatriation rules are critical factors for NRIs to consider.
Recent Legal Interpretations
Courts and CBDT circulars have clarified exemption thresholds, applicable rates, and compliance obligations. For example, interest on debentures up to ₹5,000 for residents remains exempt, while government securities generally attract TDS without a limit.
Impact on Stakeholders
- Investors: Direct impact on post-tax returns and investment decisions
- Deductors: Stringent compliance obligations to avoid penalties
- Government: Improved tax collection and reduced evasion
Conclusion
Section 193 serves as a cornerstone in India’s tax framework for interest income. For investors, it shapes portfolio strategies; for deductors, it defines compliance duties; and for the government, it ensures a steady revenue stream. Staying updated on its provisions—especially exemptions and due dates—is essential to navigate India’s tax landscape without unpleasant surprises.
FAQs
1. What is Section 193 of the Income Tax Act?
It mandates TDS on interest from securities paid to a resident, at a standard rate of 10%.
2. When is TDS under Section 193 deducted?
At the time of credit or payment, whichever is earlier.
3. What are the exemption limits?
₹5,000 for interest on listed company debentures; ₹10,000 for certain government bonds.
4. Are NRIs covered under Section 193?
Yes, though DTAA provisions may reduce the rate.
5. What happens if PAN is not furnished?
TDS is deducted at 20% or higher, depending on the case.
6. Which entities are exempt from TDS under Section 193?
LIC, GIC, and certain government-backed securities.
7. What is the penalty for late TDS payment?
Interest of 1–1.5% per month, plus possible penalties.
8. When must TDS returns be filed?
Quarterly, with deadlines varying from July to May depending on the quarter.
9. Are savings bonds covered under Section 193?
Yes, with exemptions up to ₹10,000 in interest per year.
10. Has the TDS rate under Section 193 ever been reduced?
Yes, it was temporarily lowered to 7.5% between May 14, 2020, and March 31, 2021.