With the Income Tax Act, 2025, taking effect from April 1, the Income Tax Department has moved to address concerns over whether the revised legislation alters eligibility norms for the tax deducted at source (TDS) threshold on bank interest. The clarification comes amid changes to how a “banking company” is defined under the updated framework.
Posting on X, the Income Tax Department emphasised that the rules governing TDS remain intact. Banks, including those already covered, will continue to be exempt from TDS on interest income within the prescribed threshold levels.
Clarification on TDS on interest u/s Section 194A in the case of banking institutions.
— Income Tax India (@IncomeTaxIndia) March 30, 2026
Under the provisions of Section 194A of the Income-tax Act, 1961, tax is required to be deducted at source on interest other than interest on securities. However, in terms of provisions of…
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A central feature of the updated income tax law is the reworked definition of a “banking company”. It now covers entities under the Banking Regulation Act, but stops short of clearly including institutions covered by Section 51.
This gap in wording led to apprehension among taxpayers, who feared that some institutions might be left outside the definition and be forced to deduct TDS irrespective of threshold limits.
In response, the Income Tax Department has confirmed that such entities remain within the definition of a “banking company”. This means the threshold-based TDS regime on bank interest remains unchanged, with tax deducted only beyond the prescribed limits for individuals and senior citizens.
Previously, under the Income Tax Act, 1961, provisions relating to TDS on interest income, other than securities, fell under Section 194A. Banking institutions were not obliged to deduct tax if annual interest payouts did not exceed Rs 50,000 for individuals and Rs 1,00,000 for senior citizens.
There has been no revision to the threshold under the new income tax framework, meaning banks will apply TDS only after interest income exceeds the prescribed levels. Beyond this point, deductions are made at the relevant rate, depending on compliance with conditions, including PAN disclosure or appropriate declarations.
Typically, interest payments made by banks, financial institutions, corporates and individuals, whether on deposits, loans or advances, are subject to TDS at the point of credit or payment.
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In most cases, tax is deducted at source at 10%. However, in the absence of a valid PAN, the rate is elevated to 20%. The scope of this section is limited to residents, excluding interest payments made to non-residents from its ambit.
If an individual's total taxable income is below the exemption limit, banks are not required to deduct TDS at either 10% or 20% in cases where PAN is not provided. This requires submission of Form 121, which supersedes the previous Forms 15G and 15H.
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