Section 194EE of the Income Tax Act, 1961, deals with the tax deduction at source (TDS) on income earned from bonds issued by the government. It specifically covers the income from the bonds of the National Savings Scheme (NSS) or similar savings schemes that pay interest to the bondholder.
What is Section 194EE?
Section 194EE mandates that if a person receives income from bonds issued under specified savings schemes, the payer (typically the government or a financial institution) is required to deduct tax at source at a rate of 10% on the amount of interest paid. The deduction is made before paying the interest to the bondholder.
The bonds covered under this section are usually part of government initiatives to encourage savings, like the National Savings Scheme (NSS). The TDS is thus applicable only to the income (interest) earned and not the principal amount.
Key Points to Remember:
- Rate of TDS: The TDS rate under Section 194EE is 10%. However, if the recipient fails to provide their PAN, the tax is deducted at a higher rate of 20%.
- Exemption Limit: There is no specific exemption limit under this section. The tax is deducted on the total interest earned.
- TDS Certificate: The deductor (payer) will then issue a TDS certificate (Form 16A) to the bondholder, showing the tax deducted. This certificate is important for filing income tax returns.
Example:
Let’s take an example to better understand how Section 194EE works:
Suppose Mr. Sharma holds an NSS bond and receives an interest payment of ₹10,000 on the bonds in a financial year. The bank deducts 10% TDS from this interest, which amounts to ₹1,000 (10% of ₹10,000).
Thus, Mr. Sharma will receive ₹9,000 after TDS deduction. The bank will issue a TDS certificate indicating that ₹1,000 has been deducted on his behalf. When Mr. Sharma files his income tax return, he can thus adjust this ₹1,000 TDS against the tax payable on his total income.
Conclusion:
Section 194EE is a crucial provision for those investing in NSS bonds. It ensures that the government collects taxes on interest income directly, thus reducing the chances of tax evasion. Understanding this section can also help taxpayers plan better for their tax liabilities and ensure they comply with the tax laws efficiently.
– Ketaki Dandekar (Team Arthology)
Read more about Section 194EE here – https://tax2win.in/guide/194ee