TDS rate under Section 194A vs Section 194J: TDS on interest income vs professional services
Rashmita Choudhary- May 2
- 8 min read
Tax Deducted at Source (TDS) is a crucial aspect of the Indian tax system, ensuring tax compliance across various income sources. Sections 194A and 194J of the Income Tax Act, 1961, deal with TDS on different types of income: Section 194A applies to interest income, while Section 194J governs professional or technical services. Understanding the nuances between these two sections is essential for taxpayers and businesses to comply with tax regulations, especially for FY 2024-25 and FY 2025-26.
Both sections are designed to ensure tax is deducted at source for income streams like interest earned from banks or payments made to professionals for services rendered. However, the applicability, threshold limits, and TDS rates differ significantly between them.
Table of Content
What is the difference between the TDS rates under Section 194A and Section 194J for interest income and professional services?
Answer: The TDS rates under Section 194A and Section 194J differ based on the type of income. Section 194A deals with TDS on interest income, with a rate of 10% if the payee provides a valid PAN. If PAN is not provided, the rate increases to 20%. This applies to interest income exceeding INR 5,000 in a financial year. On the other hand, Section 194J applies to professional or technical services, with a TDS rate of 10% for payments exceeding INR 30,000 in a year, also increasing to 20% if the payee does not provide PAN details. Both sections are effective for FY 2024-25 and FY 2025-26.
TDS on Interest Income Under Section 194A
Applicability of Section 194A
Section 194A of the Income Tax Act deals with the deduction of Tax Deducted at Source (TDS) on interest income, excluding interest on securities. It applies to all individuals and entities that earn interest on various types of financial instruments, such as savings accounts, fixed deposits, recurring deposits, and other deposits with banks, financial institutions, or post offices. However, it does not apply to interest earned on securities, which is covered under Section 193 of the Income Tax Act.
This section is particularly relevant to those receiving interest from financial institutions or banks, as these institutions are responsible for deducting the tax at source before crediting the interest to the recipient’s account. TDS under Section 194A ensures that tax is deducted at the time the interest is paid or credited, whichever comes first.
TDS Rate and Threshold Limits
Threshold Limit: TDS under Section 194A is applicable only when the total interest income exceeds INR 5,000 during the financial year. If the interest amount exceeds this threshold, the payer (usually a bank or financial institution) will deduct TDS on the entire amount exceeding INR 5,000.
TDS Rate: The TDS rate under Section 194A is 10% if the payee has provided a valid PAN (Permanent Account Number). This ensures a smoother and lower tax deduction. However, if the payee fails to provide a valid PAN, the tax deduction rate increases to 20%.
Exemptions for Senior Citizens: For senior citizens, who may not have income exceeding the basic exemption limit, they can submit Form 15H to the payer. By doing so, they can avoid TDS if their total income is below the taxable threshold. This exemption is a key provision, as senior citizens often earn interest income from fixed deposits and savings accounts.
Section 194A also provides relief to taxpayers by allowing them to claim the deducted TDS while filing their income tax returns, thus reducing the overall tax liability.
TDS on Professional Services Under Section 194J
Applicability of Section 194J
Section 194J of the Income Tax Act governs the TDS deduction on payments made for professional and technical services. It covers a broad range of services, such as consultancy, technical expertise, legal services, architectural services, medical services, royalty payments, and non-compete fees. The section specifically applies to professionals like doctors, lawyers, accountants, architects, engineers, and other consultants who provide these services in exchange for a fee.
It is important to note that this section does not apply to salary payments, which are covered under Section 192 of the Income Tax Act. This section is primarily aimed at ensuring that professionals and service providers meet their tax obligations by having TDS deducted at the source before payments are made to them.
TDS Rate and Threshold Limits
Threshold Limit: TDS under Section 194J is deductible when the payment for professional or technical services exceeds INR 30,000 in a financial year. If the total payment for services rendered by a professional exceeds this threshold, the payer must deduct TDS on the full amount, even if it is a single payment or multiple payments throughout the year.
TDS Rate: The standard TDS rate for fees paid under Section 194J is 10%. This applies to professional services and technical services, including payments for royalty and non-compete fees. Similar to Section 194A, if the payee fails to provide a valid PAN, the TDS rate increases to 20%.
This section also ensures that payments for services that exceed the set threshold are taxed appropriately at the source, making it easier for the government to collect tax on income that might otherwise go unreported. Service providers can claim the TDS deducted when they file their income tax returns, and it can be adjusted against their overall tax liability.
Comparison: TDS Under Section 194A vs Section 194J
Key Differences Between the Two Sections
The key differences between Section 194A and Section 194J relate to the type of income and the thresholds set for TDS deduction.
Feature | Section 194A | Section 194J |
Nature of Income | Interest income (excluding securities) | Fees for professional/technical services |
Typical Payees | Banks, financial institutions, individuals earning interest | Professionals, consultants, technical experts |
Threshold Limit | INR 5,000 per annum | INR 30,000 per annum |
TDS Rate (with PAN) | 10% | 10% |
TDS Rate (without PAN) | 20% | 20% |
Effective FYs | FY 2024-25 & FY 2025-26 | FY 2024-25 & FY 2025-26 |
Exemptions for Senior Citizens | Senior citizens can submit Form 15H to avoid TDS if income is below the taxable threshold | No specific exemption for senior citizens, but they can apply for relief under other sections if applicable |
These differences highlight the distinct areas of application for each section. Section 194A primarily targets interest income from various financial sources, while Section 194J applies to fees for services rendered by professionals and technical experts. Both sections follow similar principles for TDS deduction, such as the requirement of PAN for lower deduction rates and the threshold limits for applicability. However, the nature of the income and the payees involved in each section differ, thus catering to different taxpayer groups.
Additional Considerations for TDS Compliance
Bank Account Opening and TDS on Interest: When opening a bank account, individuals must provide their PAN details to ensure the correct deduction of TDS on interest income under Section 194A. For senior citizens, submitting Form 15H can help avoid TDS if their income is below the taxable limit. This ensures that banks or financial institutions deduct the appropriate TDS at the specified rates (10% with PAN, 20% without PAN).
TDS on Professional Services and PAN Details: For payments made under Section 194J for professional or technical services, the payee's PAN is mandatory. Failure to provide PAN details will result in the deduction of TDS at a higher rate of 20%. This provision ensures that the correct tax is deducted and helps maintain compliance with the Income Tax Act.
Latest Updates for FY 2024-25 & FY 2025-26
For both FY 2024-25 and FY 2025-26, the TDS rates under Sections 194A (interest income) and 194J (professional services) remain unchanged at 10% when the payee provides a valid PAN. However, the Finance Act 2024 introduces rationalizations across other TDS rates effective from October 1, 2024, ensuring a streamlined tax compliance process. The threshold limits for these sections continue to remain stable, offering taxpayers predictability and clarity for these financial years.
Conclusion
Understanding the difference between TDS under Sections 194A and 194J is crucial for ensuring compliance with the Income Tax Act, especially for those earning interest income or providing professional services. By adhering to the specified thresholds and rates, taxpayers can avoid penalties and ensure timely and accurate tax deductions at source. Correctly following these provisions will help individuals and businesses maintain smooth tax filing and reduce the risk of non-compliance.
FAQs
Q1. What is the TDS rate under Section 194A for interest income?
Under Section 194A, the TDS rate on interest income is 10% if the payee provides a valid PAN. If the PAN is not provided, the TDS rate increases to 20%. This applies to interest income exceeding INR 5,000 in a financial year.
Q2. How is TDS deducted on professional services under Section 194J?
DS under Section 194J is deducted at a rate of 10% for payments made for professional or technical services. If the payee fails to provide a valid PAN, the TDS rate is increased to 20%. The deduction is applicable when the payment exceeds INR 30,000 in a financial year.
Q3. What is the threshold for TDS under Section 194A for interest income?
The threshold for TDS under Section 194A is INR 5,000 in a financial year. If the total interest income exceeds this amount, TDS is deducted by the bank or financial institution.
Q4. Is TDS deducted under Section 194J applicable to salary payments?
No, TDS under Section 194J is not applicable to salary payments. Salary payments fall under Section 192, and TDS on salaries is deducted based on the applicable income tax slab.
Q5. How does PAN affect the TDS rate for both Section 194A and Section 194J?
If the payee provides a valid PAN, the TDS rate under both Section 194A and Section 194J is 10%. However, if the PAN is not provided, the TDS rate increases to 20% for both sections. Therefore, it is crucial for the payee to provide their PAN to avoid higher TDS deductions.
Q6. Can senior citizens avoid TDS on interest income?
Yes, senior citizens can avoid TDS on interest income by submitting Form 15H to the bank or financial institution, provided their total income is below the taxable limit. This form ensures that no TDS is deducted, even if the interest exceeds INR 5,000.
Q7. What types of services fall under Section 194J?
Section 194J applies to payments made for professional or technical services, including fees paid to doctors, lawyers, consultants, architects, technical experts, and similar professionals. It also covers payments for royalty and non-compete fees.
Q8. What happens if a service provider doesn’t provide PAN details under Section 194J?
If a service provider does not provide their PAN details, the payer is required to deduct TDS at a higher rate of 20% under Section 194J, instead of the standard 10%.
Q9. Are there any exemptions for TDS on interest income under Section 194A?
Yes, there are exemptions. Senior citizens can submit Form 15H to avoid TDS if their total income is below the taxable limit. Additionally, interest on certain government bonds or securities may be exempt from TDS under Section 194A.
Q10. What is the TDS rate for professional services without PAN under Section 194J?
The TDS rate for professional services under Section 194J increases to 20% if the payee does not provide a valid PAN.
Q11. Do changes in the Finance Act 2024 affect TDS rates under Sections 194A and 194J?
No, the Finance Act 2024 does not introduce any changes to the TDS rates under Sections 194A and 194J for interest income and professional services. The rates remain at 10% with PAN and 20% without PAN for both sections.
Q12. How can I ensure correct TDS deductions for interest and professional fees?
To ensure correct TDS deductions, provide your PAN details to the payer (bank or professional service provider). For interest income, senior citizens should submit Form 15H if eligible to avoid TDS. Ensure that the payments exceed the threshold limits (INR 5,000 for interest income and INR 30,000 for professional fees) before TDS is deducted.
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