The Income Tax Department has issued a clarification regarding tax deducted at source (TDS) on interest from banks following the implementation of the Income Tax Act, 2025, on April 1. This addresses questions about whether the new rules change the criteria for TDS exemptions on such income. The update stems from revisions to the definition of a ‘banking company’ in the legislation.
In a statement shared on social media, the department confirmed that TDS regulations remain the same. Banking institutions, including those previously included, continue to be exempt from deducting TDS on interest up to specified limits.
The clarification pertains to Section 194A of the Income-tax Act, 1961, which mandates TDS on interest excluding that from securities. However, certain provisions exempt banking entities.
A key change in the new tax law involves the redefined scope of a ‘banking company,’ which includes organizations regulated under the Banking Regulation Act but does not explicitly cover those under Section 51.
This ambiguity raised concerns among account holders, who worried that some banks might fall outside the definition and thus have to withhold TDS regardless of income thresholds.
The department has assured that these entities are still considered banking companies. As a result, the TDS system based on thresholds for interest from banks stays unchanged, with deductions applied only when income surpasses set amounts for regular individuals and seniors.
Under the prior Income Tax Act, 1961, Section 194A governed TDS on non-security interest. Banks did not need to withhold tax if yearly interest was below Rs 50,000 for general customers and Rs 1,00,000 for elderly individuals.
The new framework maintains these thresholds, so banks will deduct TDS only after interest exceeds them. At that stage, the deduction rate depends on factors like providing a PAN or submitting required forms.
Generally, interest from banks, financial bodies, companies, and individuals—on deposits, loans, or advances—is subject to TDS upon crediting or payment.
The standard TDS rate is 10%, but it rises to 20% without a valid PAN. This applies only to residents, not non-residents.
If a person’s total taxable income falls below the basic exemption, banks skip TDS—even at 20% without PAN—upon receipt of Form 121, which replaces the earlier Forms 15G and 15H.
