1057. Clarification regarding deduction from interest on Cumulative Deposits/Debentures/Bonds
Circular No. 643 was issued by the Central Board of Direct Taxes on 22 January 1993. Its subject is 1057. Clarification regarding deduction from interest on Cumulative Deposits/Debentures/Bonds.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Requires deduction on cumulative deposits, debentures and bonds at each periodical credit, not at maturity. Section 194A obliges a payer other than an individual or Hindu undivided family to deduct on interest other than interest on securities paid to a resident, and section 193 obliges the payer of interest on securities, which takes in debentures and bonds, to deduct, in each case at credit or payment, whichever is earlier; the Explanations to both sections deem a credit to an interest payable account, a suspense account or any other account to be a credit to the payee. Instances came to notice of deduction being made only on maturity. The Board clarifies that on cumulative deposits, debentures and bonds tax must be deducted every time interest is credited in the payer's books and not postponed to maturity, and the tax deducted must be deposited within the prescribed time. For cumulative deposits, no deduction is required if the aggregate interest credited or paid, or likely to be credited or paid, to each payee during the financial year does not exceed Rs. 2,500. Interest otherwise exempt from deduction under sections 193 and 194A, which includes interest on deposits with a banking company to which the Banking Regulation Act, 1949 applies, is unaffected.
Deduction at maturity instead of at each periodical credit was causing unnecessary hardship to recipients, and the Board points out that by not deducting and depositing on time the deductors are delaying payment of tax and attracting the penal provisions.
1057. Clarification regarding deduction from interest on Cumulative Deposits/Debentures/Bonds
1. 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" or "Suspense account" or by any other name, in the books of account for the payer, such crediting is deemed to be credit of interest income to the account of the payee and 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 postponded 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.
Circular : No. 643, dated 22-1-1993.
In a TDS survey or a section 201 order against an issuer that deducted only on maturity of a cumulative scheme.
Source: the Income Tax Department’s own published text — its page for this instrument.
