Section 193 Deduction of tax at source from interest on securities

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Section 193 Deduction of tax at source from interest on Securities

Define interest on securities?

As per section 2(28B) of Income Tax Act,1961 “interest on securities” means,-

(i) Interest on any security of the Central Government or a State Government;

(ii) interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act;]

Overview of the section

The person who is responsible for paying interest on securities to a resident shall deduct the tax component from the interest amount at the time of payment or credit to the account of payee/deductee/receiver whichever is earlier. Provisions of section 193 are not applicable to non-resident but payments to them are covered under section 195 of TDS.

 

Deductor/ payer

Any person

Deductee/ payee

Resident (For definition refer Section 6)

(Except persons referred u/s 196)

 (In case of payment to non – resident, section 194LB, 194LBA, 194LC, 194LD, 195,196B,196C, 196D will be applicable)

When

At the time of payment

                       Or

Credit to deductee or suspense account in the books of accounts.     (Read with the explanation to Section 193)

Threshold Limit

No

Rate

10% (20% if PAN not available – Sec 206AA)

When shall no tax on interest be deducted u/s 193?

No tax is deductible from the amount of interest payable on

  1. For a National Defence bond held by a resident, interest is payable at 4.25%.
  2. 25% National Defence Loan, 1968, or 4.75% National Defence Loan, 1972.
  3. National Development Bonds.
  4. 7 year National Savings Certificates (IV Issue).
  5. Debentures issued by any co-operative society (including a co-operative land mortgage bank or a co-operative land development bank) or any other institution or authority (including a public sector company with effect from June 1, 1986) notified by the CG.
  6. 50% Gold Bonds, 1977 or 7% Gold Bonds, 1980, held by a resident individual if the interest, in any case, does not exceed Rs. 10,000/-
  7. Any security of CG or SG. [except interest exceeding 10,000 on 8% Savings (Taxable) Bonds, 2003 or 7.75% Savings (Taxable) Bonds, 2018]
  8. Any security owned or beneficially owned by:
    • LIC of India
    • GIC of India
    • Four companies formed by virtue of Section 16(1) of General Insurance Business (Nationalisation) Act, 1972 which are:-
      • National Insurance Company Limited
      • New India Assurance Company Limited
      • Oriental Insurance Company Limited
      • United India Insurance Company.
    • Any other insurer.
  9. Any listed dematerialized security.
  10. Debentures issued by a listed company to a resident individual or HUF and amount of interest are paid by an account payee cheque and does not exceed Rs. 5,000 (Rs. 2,500 before 1st July 2012).

 

Who are the persons where no tax on interest is deducted u/s 193?

As per section 196 TDS shall not be deducted on payment made to following persons:-

  1. Government
  2. RBI
  3. Corporation established under a Central Act whose income is exempt from IT.
  4. Mutual Fund u/s 10(23D).

 

What are the relevant reportable clauses in Form 3CD – Tax Audit Report? 

Relevant reportable clauses in Form 3CD – Tax Audit Report are

# Clause 21B(ii)

Amounts inadmissible u/s 40(a)(ia) – 30% disallowance

The following shall be reported:

(A) Details of payment on which tax is not deducted :

Date of payment

Amount of payment Nature of payment Name of payee PAN of payee Address line 1 Address line 2 City/Town/ District

Pincode

(B) Details of payment on which tax has been deducted but has not been paid on or before the due date specified in sub-section (1) of section 139 :

Date of payment Amount of payment Nature of payment Name of payee PAN of payee Address line 1 Address line 2 City/Town/ District Pincode Amount of tax deducted Amount of (VI) deposited if any

 

# Clause 34A

Here, all the payments made by the company of interest of securities as well as the amount of TDS deducted on those payments have to be reported.

 

Relevant circulars relating to TDS u/s 193

  •  Exemption to certain defense funds – Regimental Fund or Non-public Fund established by Armed Forces of the Union for the welfare of past and present members of such forces or their dependents, no TDS shall be deducted u/s 193 since their income is exempt u/s 10(23AA). – Circular No. 735, dated 30-01-1996. 
  • Securities registered in name of a banking company – Where government securities are registered in the name of a banking company, TDS will be applicable to banking company without regard to the status of the beneficial owner. – Circular No. 2-P (XXXIV-4), dated 16-5-1966. 
  • Exemption to Ramakrishna Math and Ramakrishna Mission – whose income is exempt u/s 10(23C)(iv), interest payable to above-mentioned shall be without TDS deduction u/s 193. – Circular No. 11/2002, dated 22-11-2002.
  • Exemption to recognized provident fund – whose income is exempt u/s 10(25)(ii), income by way of interest on securities of CG and SG may be paid without TDS u/s 193. – Circular No. 741, dated 18-4-1996. 
  • Interest on Deep discount bonds – Tax is required to be deducted at the time of redemption of these bonds, irrespective that the holder has declared income on accrual basis. If the income is declared by the holder of a bond on accrual basis, to comply with any other law, then he can file Form 13/15H to the A.O. If A.O. is satisfied that the income is declared by the holder on yearly basis, then he shall issue a certificate u/s 197 allowing TDS to be deducted at the reduced rate. –  Circular No. 4/2004, dated 13-5-2004.
  • Exemption to Sri Ram Chandra Mission – No TDS u/s 193, 194, 194A and 194K – Circular No. 2/2003, dated 11-3-2003.
  • Exemption to World Renewal Spiritual Trust – No TDS u/s 193, 194A and 194K – Circular No. 3/2003, dated 11-3-2003

Relevant Forms & their due dates relating to TDS u/s 193

  • Form 26Q (Rule 31A) Quarterly statement of TDS u/s 200(3) (TDS return)

(No need to file Nil Return for any quarter)

Quarter

Due date for filing

Q1

July, 31

Q2

October, 31

Q3

January, 31

Q4

May, 31

  • Form 16A [Rule 31(1)(b)] – It is a Certificate u/s 203 for TDS which to be issued to the deductee by the Deductor.

Quarter

Due date for issuing

Q1

August, 15

Q2

November, 15

Q3

February, 15

Q4

June, 15

 

  • Form 13/15G/15H – It is a form to be filed to A.O. for obtaining a certificate for lower or no deduction of TDS u/s 197.

Relevant Case Laws relating to TDS u/s 193

  • Transfer to Interest payable account and when the payee is not identifiable

Sec. 199 makes it clear that credit of TDS can be given to a person whose has earned the income. Sec. 203(1) lays down that for all TDS the tax deductor has to “furnish to the person to whose account such credit is given or to whom such payment is made or the cheque or warrant is issued” which presupposes that at the time of credit the deductor should know the name of the deductee. In this view of the matter, TDS cannot be deducted until the identity of the person in whose hands; it is includible as income can be ascertained. As per the explanation of Section 193, if interest is credited to any account then it shall be deemed that it is credited to the account of the payee. Explanation to s. 193 cannot be invoked in a case where the person who is to receive the interest cannot be identified at the stage at which the provision for interest accrued but not due is made. This position is also accepted by the CBDT, as evident from its letter dated. 5th July, 1996 addressed to the Tata Iron & Steel Co. Ltd.”   [Industrial Development Bank of India vs. ITO [2006] 104 TTJ 230 (Mum)]  

  • No TDS u/s 193 when a sick company (assessee) merely debited interest on debentures to comply with Companies Act

Interest was booked in the books merely to comply with the provisions of the companies act. There is no income in the hands of debenture holders, financial institutions. They have also not recognized the income in their books. The debenture holders have considered investment in debentures in assessee’s company and interest thereon as Non-Performing Asset (NPA). The assessee has not claimed interest as deductible expenses.  [Income-tax officer (TDS)-3(4), Mumbai v. Baroda Rayon Corpn. Ltd [2016] 65 taxmann.com 157 (Mumbai – Trib.)]

 

The author of the article is CA Mehul Gupta. For any further queries either comment in the section below or  write to the author on guptamehul6295@gmail.com or +918368972811.


 

 

 

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