As the new Income Tax Act 2025 is set to come into effect on 1 April 2026, the Central Board of Direct Taxes (CBDT) on Monday issued a clarification on how tax deducted at source (TDS) will apply to interest earned from banks or the post office deposits.
Addressing concerns over whether some banking institutions will continue to enjoy threshold-based exemptions, the department said that banks regulated under the Banking Regulation Act, 1949, will now be required to deduct TDS on interest incomes if it exceeds the specific threshold.
I-T dept issues clarification
News agency PTI reported that under the Income Tax law, TDS is to be deducted if the interest income from bank or post office deposits exceeds ₹50,000 for ordinary citizens, or ₹1 lakh for senior citizens, in a financial year.
In a post on X, the Income Tax Department clarified that under Section 402 of the Income Tax Act, 2025, the term “banking company” applies to entities governed by the Banking Regulation Act, 1949.
Under the Income-tax Act, 1961, the definition of a “banking company” extended beyond entities covered by the Banking Regulation Act, 1949, to also include banks and financial institutions mentioned in Section 51 of that law.
The Income Tax Department explained that, since Section 51 of the Banking Regulation Act remains in force, these entities are still considered “banking companies” under Section 402 of the Income-tax Act, 2025, even if they are not specifically named.
As a result, such banks or institutions will not need to deduct income tax on amounts that fall below the threshold specified in Section 393(1), the department added.
TDS deduction under Income-tax Act, 1961
As per the current framework of the Income-tax Act of 1961, under Section 194A, TDS is applicable to interest income (apart from interest earned on securities). However, banks are now required to deduct TDS if the interest paid is below the limit of ₹50,000 or ₹1,00,000, depending on the category of the taxpayer.
Changes between the new and old law
In the Income-tax Act, 2025, rules related to TDS on interest income are specified in Section 393(1), while the term “banking company” is separately defined under Section 402 of the law.
However, under Section 51 of the Banking Regulation Act, 1949, certain banks and institutions were referenced under it, within the definition of “banking company.”
What does this mean for taxpayers?
According to a CNBC TV-18 report, here's what this would mean for taxpayers:
- Banks and qualifying financial institutions will continue to avoid deducting TDS on interest income that falls below the specified limits.
2. The range of institutions covered remains largely the same.
3. Depositors will not be subject to extra TDS simply because of changes in definitions under the new law.
