TDS on bank interest explained: Who is liable and how much gets deducted under new income tax rules?

With the Income Tax Act, 2025 coming into effect on April 1, the Income Tax Department clarified whether the eligibility criteria for the TDS threshold on bank interest has undergone any change, even as the new law tweaks the definition of a “banking company.”

In a X (formerly Twitter) post, I-T Department said on March 30, that there has been no change in existing provisions and that banks, including those covered earlier, will continue to enjoy exemption from tax deducted at source (TDS) on interest below the prescribed threshold limits.

What changed under the Income Tax Act, 2025?

Under the new income tax framework, the primary change is the definition of a “banking company.” It now refers to entities governed by the Banking Regulation Act, but does not explicitly mention institutions covered through Section 51.

That absence led to confusion among stakeholders, whether some institutions could fall outside the definition and therefore be required to deduct TDS without applying the threshold.

However, I-T Department clarified that such institutions still fall within the definition of “banking company.” This means that depositors will not see any changes in how TDS on bank interest will be applied. The threshold-based system will be continued, and banks will deduct tax only when interest exceeds the prescribed limits for individuals and senior citizens.

What is the prescribed limits for TDS on bank interest?

Under the earlier Income Tax Act, 1961, TDS on the interest income, except for securities, was governed by Section 194A. Banking institutions were not required to deduct TDS if the total interest paid to a depositor did not exceed ₹50,000 in a financial year for individuals or ₹100,000 for senior citizens.

The threshold remains unchanged under the new income tax framework, and banks will continue to deduct TDS only when the interest income exceeds these prescribed limits. Once the threshold is crossed, TDS is generally deducted at the applicable rate on the interest income, subject to conditions such as submission of PAN or relevant declarations.

How much TDS is deducted?

TDS usually applies to payments made by banks, financial institutions, companies, and individuals where interest is credited or paid on deposits, loans, or advances.

The tax is generally deducted at a rate of 10%, but if the recipient fails to provide a valid Permanent Account Number (PAN), the rate increases to 20%. This section is only applicable to a resident. Thus, the provisions of section 194A are not applicable in case of payment of interest to a non-resident.

However, if your total taxable income is below the exemption limit, you can avoid the 10% TDS (or 20% if no PAN is provided) deducted by the bank. In order to do so, one can submit the Form 121 (which has replaced the previous Form 15G and Form 15H).

Payments made by institutions to non-residents are also covered under TDS mechanism. However, tax in such a case is to be deducted as per Section 195, according to Cleartax.