INCOME TAX

Deduction of tax at source from interest on cumulative deposits/debentures/bonds--Clarification regarding

Circular No. 643

Dated 22/1/1993

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 prescribed rate thereon, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode whichever is earlier.

2. Similarly, section 193 of the Act lays down that the person responsible for paying any income by way of interest on securities (which term includes debentures, bonds, etc.) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax at the rate in force on the amount of interest payable.

3. According to the Explanations contained in sections 193 and 194A, where the interest income is credited to any account, whether called "Interest payable account" of "Suspense account" or by any other name, in the books of account of the payer, such crediting is deemed to be credit of interest income to the account of the payee and the provisions of tax deduction at source, of sections 193 and 194A, as the case may be, are attracted.

4. Instances have come to the notice of the Board, wherein tax has been deducted at source at the time of payment on maturity of the cumulative deposits/debentures/bonds and not at the time of credit of the interest income at periodical intervals. This causes unnecessary hardship to the recipients. As per the provisions of the law, tax has to be deducted at source at the time of credit of interest, or payment thereof, whichever is earlier.

5. It is hereby clarified that in respect of cumulative deposits/debentures/bonds, tax is required to be deducted at source every time the interest is credited in the account books of the payer and is not to be postponed till the maturity of the deposit debenture/bonds. The tax so deducted is also required to be deposited in the account of the Central Government within the prescribed time. However, in the case of cumulative deposits, tax is not required to be deducted if the aggregate amount of interest credited/paid or likely to be credited/paid during the financial year to each payee does not exceed Rs.2,500.

6. By not deducting and depositing the tax, as aforesaid, the tax deductors are delaying payment of tax, which attracts penal provisions contained in the Income-tax Act. The tax deductors are advised to follow the correct position of law, as outlined above.

7. It may, however, be stated that tax is not required to be deducted from interest incomes which are otherwise exempted from tax deduction under sections 193 and 194A. These exemptions include interest on deposits with a banking company to which the Banking Regulation Act, 1949, applies.

(Sd.) Rajesh Chandra,

Under Secretary to the Government of India