The Income Tax Department has reaffirmed the applicability of Tax Deducted at Source (TDS) provisions on interest income under the new Income Tax Act, 2025, particularly in relation to the definition of "banking company."
Background: TDS on Interest Under Section 194A
Under the existing provisions of the Income-tax Act, 1961, Section 194A mandates the deduction of tax at source on interest income (other than interest on securities). However, an important relief is provided under Section 194A(3), where banking companies are not required to deduct TDS if the interest paid does not exceed specified thresholds:
- Rs 50,000 (general cases)
- Rs 1,00,000 (in specified cases such as senior citizens)
Additionally, the definition of "banking company" under the 1961 Act included not only entities governed by the Banking Regulation Act, 1949, but also banks and institutions referred to under Section 51 of that Act.
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…
What Changes Under the Income Tax Act, 2025?
With the introduction of the Income Tax Act, 2025, the corresponding provision for TDS on interest is now covered under Section 393(1) (Table: Sl. No. 5(ii)), while the definition of "banking company" has been outlined under Section 402.
Notably, the revised definition in Section 402 does not explicitly include the earlier phrase:
"including any bank or banking institution referred to in section 51 of the Banking Regulation Act, 1949."
Key Clarification: No Change in Practical Scope
Despite the omission of this phrase, the government has clarified that there is no substantive change in interpretation.
This is because:
- Section 51 of the Banking Regulation Act, 1949 already extends the applicability of banking regulations to certain institutions.
- Therefore, such banks and institutions continue to fall within the scope of "banking company" under Section 402 of the Income-tax Act, 2025.
Implication for Banks and Depositors
The clarification ensures continuity and avoids confusion in compliance:
- Banks and eligible institutions are not required to deduct TDS on interest payments below the prescribed threshold under Section 393(1).
- Depositors will continue to enjoy the same threshold benefits as before.
- The change is clarificatory in nature, not substantive.
Conclusion
The clarification reinforces that the transition from the Income-tax Act, 1961, to the Income-tax Act, 2025, does not alter the TDS obligations for banking institutions in practical terms. By maintaining continuity in the interpretation of "banking company," it ensures ease of compliance and prevents unnecessary litigation.
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