TDS on Interest (Section 194A / 393): Guide for FY 2026-27

TDS on Interest (Section 194A / 393): Complete Guide for FY 2026-27

Section 194A is one of the most commonly applied TDS provisions in India. Every business that pays interest on loans, deposits, advances, or any other debt (other than interest on listed securities, which falls under Section 193) must evaluate whether TDS applies.

Banks deduct TDS on fixed deposit interest. Companies deduct TDS on inter-corporate deposits. NBFCs deduct TDS on interest paid to depositors. Partnership firms are exempt when paying interest to partners, but must deduct when paying interest to third parties.

This guide covers the rates, thresholds, exemptions, and filing requirements as they apply from FY 2026-27 onward under both the Income Tax Act 1961 and the Income Tax Act 2025.

Who Must Deduct TDS Under Section 194A

Any person responsible for paying interest (other than interest on securities) to a resident must deduct TDS, provided they meet the applicability criteria:

• Any company (private or public)
• Any partnership firm (including LLPs) paying interest to non-partners
• Any co-operative society (including cooperative banks)
• Banking companies (scheduled banks, private banks, public sector banks)
• Post offices (on time deposits, recurring deposits)
• Central Government or State Government (or any local authority)
• Any individual or HUF whose total sales, gross receipts, or turnover exceeded Rs 1 crore (business) or Rs 50 lakh (profession) in the immediately preceding financial year

The individual/HUF threshold is the same as Section 194C, 194H, and 194J. If your business crossed Rs 1 crore turnover in FY 2025-26, you must deduct TDS on interest payments starting FY 2026-27.

What Qualifies as "Interest" Under Section 194A

The definition is broad. "Interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim, or other similar right or obligation). This includes:

TDS Rate

The 10% rate has remained unchanged across the transition from the 1961 Act to the 2025 Act.

Threshold Limits: When TDS Is Not Required

The thresholds were revised upward by the Finance Act 2025, effective April 1, 2025, and continue to apply in FY 2026-27:

Banks, Cooperative Banks, and Post Offices

The threshold is computed on the aggregate interest credited or paid by all branches of the bank to the same person in a financial year. If a person holds FDs across three branches of the same bank, the bank must add up the interest from all three branches to check the threshold.

All Other Payers (Companies, NBFCs, Firms, Individuals)

This applies to interest on loans, advances, deposits with companies, and any other interest payment not covered by the banking category above.

Complete List of Exemptions: Section 194A(3)

The following interest payments are specifically exempt from TDS under Section 194A:

1. Interest paid by a firm to its partners. A partnership firm (including an LLP) paying interest on capital or current account balances to its partners is not required to deduct TDS. The exemption applies regardless of the amount.

2. Interest paid by a cooperative society to its members. A cooperative society (other than a cooperative bank) paying interest on deposits to its members is exempt from TDS. However, a cooperative bank paying interest to its depositors (including members) must deduct TDS if the threshold is exceeded.

3. Interest paid by one cooperative society to another cooperative society. No TDS is required on interest payments between cooperative societies.

4. Interest on savings bank accounts. Interest credited to a savings bank account (not fixed deposit or recurring deposit) is exempt from TDS under Section 194A, regardless of the amount. Note: this exemption is for TDS deduction only. The interest is still taxable income for the recipient above Rs 10,000 (Section 80TTA) or Rs 50,000 (Section 80TTB for senior citizens).

5. Interest on specified post office schemes. Interest on Post Office Time Deposits, Post Office Recurring Deposits, Post Office Monthly Income Account, Kisan Vikas Patra (KVP), National Savings Certificate (NSC VIII Issue), and Indira Vikas Patra is exempt from TDS.

6. Interest on income tax refund. Interest paid by the Income Tax Department on refunds under Section 244A is not subject to TDS.

7. Interest on compensation for compulsory acquisition. Interest on compensation or enhanced compensation awarded by courts for compulsory acquisition of property is exempt from TDS under Section 194A.

8. Interest paid to banking companies, LIC, UTI, and financial corporations. Interest paid to these institutions is exempt because they are subject to their own tax compliance framework.

9. Interest on PPF, EPF, and Sukanya Samriddhi Yojana. Interest on PPF is fully exempt under Section 10(11), and no TDS is deducted. Interest on EPF is exempt if the employee has completed 5 years of continuous service. Interest on SSY is exempt under Section 10(11A).

10. Interest on Zero Coupon Bonds. No TDS is applicable on zero coupon bonds as there is no periodic interest payment.

Form 15G and Form 15H (Form 121 from FY 2026-27)

A resident individual or HUF can submit Form 15G (if below 60 years) or Form 15H (if 60 years or above) to the payer, declaring that their total income for the year is below the taxable limit. On receiving this declaration, the payer must not deduct TDS.

Conditions for Accepting Form 15G

• The payee must be a resident individual, HUF, or a person other than a company or firm.
• The tax calculated on the estimated total income for the year must be nil.
• The aggregate interest income from the payer must not exceed the basic exemption limit.

Conditions for Accepting Form 15H (Senior Citizens)

• The payee must be a resident individual aged 60 years or above.
• The tax calculated on the estimated total income for the year must be nil.
• There is no cap on the interest amount (unlike Form 15G).

Payer's Obligation

The payer must:

1. Collect Form 15G/15H from the payee before the first interest payment or credit of the financial year.
2. Allot a unique identification number to each declaration.
3. Upload all declarations to the income tax e-filing portal quarterly (by the 15th of the month following the quarter end).
4. Retain copies for 6 years.

Accepting a Form 15G/15H without verifying the conditions can make the payer liable under Section 201(1) as an "assessee in default" if the payee's actual income turns out to be above the taxable limit.

Transition to Form 121

From FY 2026-27, under the Income Tax Act 2025, Form 15G and Form 15H are replaced by Form 121. Form 121 consolidates both declarations into a single form. The underlying conditions remain substantially the same.

When to Deduct: Time of Credit or Payment

TDS under Section 194A must be deducted at the earlier of:

• The date of credit of interest to the payee's account (including "interest payable" account or any suspense account), or
• The date of actual payment of interest

This is important for banks and NBFCs that accrue interest quarterly but pay it at maturity. TDS must be deducted at the time of credit to the account, not at the time of FD maturity.

For companies paying interest on inter-corporate deposits or loans, TDS is typically deducted when interest is credited in the books of account at the end of each quarter or financial year, even if the actual cash payment happens later.

Transition to Income Tax Act 2025: Section 393

From April 1, 2026, the Income Tax Act 2025 consolidates all non-salary TDS provisions into Section 393. Section 194A is now part of Section 393(1) with a specific payment code in the new table-driven framework.

The CPC will reject TDS returns that reference old section "194A" for payments made on or after April 1, 2026. Use the new Section 393 payment code in Form 140.

Due Dates for TDS Deposit and Filing

Monthly Challan Deposits

Quarterly Return Filing (Form 140, replacing Form 26Q)

After filing the quarterly return, issue Form 16A (TDS certificate) to each payee within 15 days of the due date for filing the return.

Common Mistakes and How to Avoid Them

1. Not aggregating interest across branches. Banks must aggregate interest from all branches for the same PAN to check the Rs 50,000 or Rs 1,00,000 threshold. Deducting TDS per branch instead of per PAN results in under-deduction and penalties.

2. Deducting TDS on interest paid to partners. Interest paid by a partnership firm to its partners is explicitly exempt under Section 194A(3)(iv). Deducting TDS on partner interest creates unnecessary compliance work and requires the partner to claim a refund.

3. Ignoring accrued interest. TDS must be deducted when interest is credited, not when it is paid. If you accrue interest in your books at year-end, you must deduct TDS at the time of credit even if the cash payment happens in the next financial year.

4. Not collecting Form 15G/15H before the first interest credit. The declaration must be received before the first payment or credit. Accepting Form 15G/15H after TDS has already been deducted does not entitle you to reverse the deduction. The payee must claim the refund in their ITR.

5. Confusing Section 194A with Section 193. Section 193 covers interest on listed securities and government bonds. Section 194A covers everything else (FDs, loans, deposits, advances). Using the wrong section code on the TDS return will cause processing errors under the new Section 393 framework.

6. Not deducting TDS on interest to cooperative society members. If the payer is a cooperative bank (not a regular cooperative society), TDS must be deducted on interest paid to depositors, including members. The exemption in Section 194A(3)(v) for cooperative-to-cooperative payments does not apply to cooperative banks paying their depositor members.

Section 80TTA and 80TTB: Deduction for Interest Recipients

While Section 194A governs TDS deduction by the payer, recipients of interest income can claim deductions on their taxable interest:

These deductions reduce the taxable interest income in the hands of the recipient, not the TDS obligation of the payer.

Compliance Checklist for FY 2026-27

• Identify all interest payments you make: FDs, loans to employees, inter-corporate deposits, advances, security deposits.
• Check the aggregate threshold per payee: Rs 50,000 (banks) or Rs 10,000 (others). For senior citizens at banks: Rs 1,00,000.
• Collect PAN from every payee. Without PAN, deduct at 20%.
• Collect Form 121 (replacing Form 15G/15H) from payees who claim nil tax liability, before the first interest credit.
• Deduct TDS at 10% when interest is credited or paid, whichever is earlier.
• Deposit TDS by the 7th of the following month. Set a recurring calendar reminder.
• File Form 140 (replacing Form 26Q) quarterly and issue Form 16A within 15 days of the filing due date.
• Upload Form 121 declarations to the e-filing portal quarterly.
• Update your TDS software to use Section 393 payment codes for Q1 FY 2026-27 onward.

Tax Garden Handles Your TDS Compliance

Tax Garden's TDS compliance plans track every interest payment, apply the correct threshold and rate, deposit TDS before the monthly deadline, and file Form 140 on time every quarter. We also manage Form 121 collection and upload. Compliance tracked and filed on every deadline, reducing your exposure to disallowances and penalty notices.

For related topics, see our guides on TDS rate chart for FY 2026-27, TDS on contractor payments (Section 194C), TDS on commission (Section 194H), TDS on rent (Section 194I), TDS on professional fees (Section 194J), TDS return filing with Form 24Q and 26Q, Form 121 replaces Form 15G/15H, and the TDS and TCS section changes for April 2026.

Frequently Asked Questions

Is TDS under Section 194A applicable on interest paid to non-residents?

No. Section 194A applies only to payments made to residents. Interest payments to non-residents are covered under Section 195 (now part of the Section 393 framework for non-resident payments), with rates determined by the applicable DTAA or the rates specified in the Act (typically 20% plus surcharge and cess), whichever is lower.

Does TDS apply on interest paid on a security deposit held for rented premises?

If you hold a security deposit from a tenant and pay interest on it, TDS under Section 194A applies if the aggregate interest exceeds Rs 10,000 in the financial year (for non-banking payers). The interest on the security deposit is 'interest on a deposit' under the definition, and TDS must be deducted at 10%.

My company pays interest on late payment of invoices to vendors. Is TDS required?

Yes. Interest on late payment of invoices or outstanding amounts qualifies as 'interest payable in respect of any debt incurred' and is subject to TDS under Section 194A at 10% if the aggregate exceeds Rs 10,000 per vendor per financial year.

Does TDS apply on interest earned on an FD pledged as margin with a bank?

Yes. The bank must deduct TDS on the interest credited on the FD, regardless of whether the FD is pledged or free. The pledging of the FD does not change the TDS obligation.

Can a company submit Form 15G to avoid TDS on FD interest?

No. Form 15G can only be submitted by an individual, HUF, or a person other than a company or firm. Companies and firms cannot submit Form 15G. However, they can apply for a lower or nil deduction certificate under Section 197 if their tax liability is expected to be lower than the TDS that would be deducted.

Is TDS applicable on interest on PPF or EPF?

No TDS is deducted on PPF interest as it is fully exempt under Section 10(11). EPF interest is exempt from TDS if the employee has completed 5 years of continuous service. However, for taxable EPF contributions exceeding Rs 2.5 lakh per year (Section 9D threshold), TDS may apply on the interest attributable to the excess contribution.

What if I deduct TDS but forget to deposit it by the 7th?

Interest under Section 201(1A) applies at 1.5% per month (or part of a month) from the date of deduction to the date of actual deposit. Additionally, you cannot claim the expense as a deduction under Section 40(a)(ia) until the TDS is actually deposited. Late deposit is a compliance red flag that can trigger penalty proceedings under Section 271C.

Sources

This guide is verified against Section 194A of the Income Tax Act, 1961 (TDS on interest other than interest on securities), Section 194A(3) (complete list of exemptions including partnership firms, cooperative societies, savings accounts, post office schemes, and income tax refund interest), Section 393(1) of the Income Tax Act, 2025 (consolidated non-salary TDS table, effective April 1, 2026), Finance Act 2025 (threshold revision: banks from Rs 40,000 to Rs 50,000, senior citizens from Rs 50,000 to Rs 1,00,000, others from Rs 5,000 to Rs 10,000, effective April 1, 2025), Section 197 (lower deduction certificate), Section 197A (Form 15G/15H declarations), Section 206AA (TDS at 20% for no PAN), Section 201(1A) (interest on late deduction/deposit at 1% to 1.5% per month), Section 40(a)(ia) (disallowance for non-deduction or non-deposit), Section 80TTA (Rs 10,000 deduction on savings interest), Section 80TTB (Rs 50,000 deduction for senior citizens), and Section 271C (penalty for failure to deduct). Rates, thresholds, and exemptions confirmed from ClearTax, TaxGuru, BajajFinserv, and CAClubIndia reference materials as of May 2026. All rates and thresholds should be verified against incometax.gov.in before applying to specific deductions.