s.194A — Tax deducted on interest other than interest on securities
A payer other than a small individual or Hindu undivided family must deduct tax at the rates in force on interest, other than interest on securities, credited or paid to a resident above a yearly threshold.
The threshold figures in sub-section (3)(i) and the senior citizen figure were raised by the Finance Act, 2025 (Act No. 7 of 2025) with effect from 1 April 2025. The counterpart in the Income-tax Act, 2025 is serial 5 of the Table in section 393(1), items (ii) and (iii), with the payer defined through specified person in section 402(37).
Income-tax Act, 1961
s.194A
Income-tax Act, 2025
s.393(1) Table serial 5
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 194A of the Income-tax Act, 1961 requires any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than interest on securities, to deduct income-tax at the rates in force at the time of credit of the income to the payee's account or of payment, whichever is earlier. The proviso brings in an individual or Hindu undivided family whose total sales, gross receipts or turnover exceeded one crore rupees in business, or fifty lakh rupees in a profession, in the preceding financial year. Under the Explanation, crediting interest to an interest payable account, a suspense account or an account by any other name in the payer's books is a credit to the payee. Sub-section (3)(i) excludes interest that does not exceed, in the financial year, fifty thousand rupees where the payer is a banking company, a co-operative society engaged in banking or the post office on a notified deposit, one lakh rupees in those cases where the payee is a senior citizen, and ten thousand rupees in any other case; the figures were raised by the Finance Act, 2025 from 1 April 2025. Clauses (ix) and (ixa) deal with interest on compensation awarded by a Motor Accidents Claims Tribunal; there is no corresponding carve-out for interest on land acquisition compensation. Because the section turns on the payment being interest, whether delay compensation or a similar contractual payment is within it depends on the definition of interest in section 2(28A). Payments to non-residents fall under section 195. The counterpart in the Income-tax Act, 2025 is serial 5 of the Table in section 393(1): item (ii) for a banking company, a co-operative society carrying on banking and the post office, with thresholds of fifty thousand rupees and one lakh rupees for a senior citizen, and item (iii) for any other specified person, with a threshold of ten thousand rupees. A specified person under section 402(37) is anyone other than an individual or Hindu undivided family, or an individual or Hindu undivided family above the one crore rupee business or fifty lakh rupee professional turnover limit in the preceding tax year.
What the provision does
Makes a payer of interest to a resident, other than a small individual or Hindu undivided family, deduct tax at the rates in force once the year's interest crosses the threshold. It does not decide the character of the receipt in the payee's hands, it does not apply to interest on securities or to non-residents, and on the Calcutta High Court's view it does not reach contractual compensation for delayed possession where there is no debt or borrowing behind the payment.
Threshold questions
- Is the payer an individual or Hindu undivided family below the turnover or gross receipts limits in the proviso
- Is the payment interest at all, as defined in section 2(28A), rather than compensation for loss of use of property
- Is the payee a resident
- Does the interest credited or paid in the financial year exceed the threshold that applies to the payer and the payee
- Was the interest credited to a suspense or interest payable account, which counts as credit to the payee
In practice
The recurring disputes.
Delay compensation computed as interest
Allotment and redevelopment agreements often compute compensation for late possession as interest on money paid. The Revenue's argument, recorded in PCIT v. West Bengal Housing Infrastructure Development Corporation (Calcutta High Court, 9 August 2018), is that section 2(28A) reaches interest payable in respect of a deposit, claim or other similar right or obligation, so the payer must deduct and is disallowed under section 40(a)(ia) if it does not. The High Court held that the payment under the allotment clause was purely contractual compensation for the allottee's inability to use or possess the property, that the word "interest" in the clause was merely a quantification of the liability, and that with neither borrowing nor debt section 2(28A) had no application. That is a payer-side ruling from Kolkata; developers still deduct in some cases, as Emaar did in Bhupinder Singh Julka.
Tax deducted on a receipt the payee treats as capital
In Bhupinder Singh Julka (Delhi Tribunal, August 2023) the builder credited delay compensation, computed at nine per cent simple interest, in its statement of account and deducted tax under this section; the Tribunal nonetheless held the receipt capital and deleted the addition, so the payer's deduction did not fix the character. In Vijay Kumar Bhan (Mumbai Tribunal, September 2024) delay compensation reflected in Form 26AS was added by an intimation under section 143(1) and upheld by the Commissioner (Appeals) under section 56(2)(x), and the Tribunal deleted it as a capital receipt akin to hardship compensation. The Revenue's best argument on credit, the reasoning of a Commissioner (Appeals) recorded in Coastal Gujarat Power (Mumbai Tribunal, March 2017), is that claiming credit for tax deducted while calling the receipt capital is self-contradictory: section 198 deems sums deducted to be income received, and under rule 37BA credit is given for the year in which the income is assessable. The Tribunal set that order aside and held the receipt capital without dealing with the point, so the remark survives only as an argument. The payee's answer is that section 198 operates only in computing income that is otherwise chargeable and does not turn a capital receipt into income, and that the tax was paid out of his money. Whether, and for which year, the payee may claim a refund of tax deducted on a receipt held not to be income has not been decided.
Compensation for a redevelopment overrun
When a developer overshoots the possession date and pays the member further monthly sums or a lump sum, the member's argument is that the payment compensates for loss of use, as the Mumbai Tribunal said of a buyer's delay compensation in Vijay Kumar Bhan, and is neither interest nor income. In Pradyot B. Borkar (January 2020) a Rs 25 lakh component paid for the developer's non-adherence to the agreed terms was taxed as capital gains, but because the member himself offered it so and claimed section 54. The Revenue's argument is that a sum computed at a rate over time is interest and income from other sources, and that a deduction by the payer under this section shows how the parties understood it. The orders found do not reach a society member's overrun compensation.