Exemptions and Reduced Rates for Section 194 A 

Use

Under Section 194 A of the Income Tax Act, you withhold tax on interest payments that you make, with the exception of interest on securities. You declare such taxes withheld using form 26A.

However, some payments are exempt from withholding tax, and on others, you only have to withhold tax at a reduced rate – for example, if the recipient of the payment is a bank or is a company in possession of an exemption certificate.

When you prepare your annual return, you have to declare how much interest you have paid to companies without withholding tax or with reduced-rate tax.

Activities

Customizing

Define separate withholding tax codes for calculating withholding taxes at the reduced rates and for exemptions.

Make the additional settings for the withholding tax codes in Customizing for Financial Accounting (FI), by choosing Financial Accounting Global Settings ® Withholding Tax ® Extended Withholding Tax ® Calculation ® Exemptions and Reductions.

Master Data

Enter the appropriate withholding tax codes in your customer masters and vendor masters as normal. Do not enter any exemption reasons.

Day-to-Day Activities

Whenever you post a withholding tax item that falls under this section of the Income Tax Act, make sure that you use the appropriate tax code.

Reporting

When you create a TDS return, it shows how many rupees’ worth of business you have taxed at a reduced rate, and how much was exempt from tax.