The Government has proposed an amendment to Section 393(4) of the Income-tax Act to remove the requirement of tax deduction at source (TDS) on interest income paid to co-operative societies engaged in banking business, including co-operative land mortgage banks.
What the Law Currently Provides
Section 393(4) of the Act specifies certain situations where tax is not required to be deducted at source under the corresponding provisions of the Income-tax Act, 1961. However, the existing framework did not explicitly extend TDS exemption to interest income paid to co-operative banks, leading to interpretational issues and compliance inconsistencies.
What is Being Amended
To align the Act with the provisions of the Income-tax Act, 1961, the Government has proposed an amendment to Section 393(4) (Table – Sl. No. 7, Column C(a)(i)).
Under the proposed change:
- No tax shall be deducted at source on interest income (other than interest on securities)
- Where such interest is credited or paid to any co-operative society engaged in the business of banking, including a co-operative land mortgage bank
This amendment brings clarity and removes the obligation on payers to deduct TDS on such interest payments.
Effective Date
The proposed amendment will come into force from April 1, 2026 , and will apply accordingly from Assessment Year 2026-27 onwards.
Impact and Significance
- Reduces compliance burden for banks and institutions paying interest to co-operative banks
- Ensures parity with Income-tax Act provisions
- Improves liquidity and ease of operations for co-operative banking institutions
- Minimises disputes arising from TDS applicability on inter-bank interest transactions
Conclusion
The amendment under Clause 72 is a welcome step towards rationalising TDS provisions and providing long-needed clarity to the co-operative banking sector. Stakeholders should take note of the effective date to ensure smooth transition and correct TDS compliance from FY 2026-27 onwards.
Official copy of the Clause is as follows
No tax to be deducted at source in respect of interest income credited or paid to any cooperative society engaged in carrying on the business of banking (including a cooperative land mortgage bank)
Section 393(4) of the Act provides for the conditions where tax is not required to be deducted at source under the corresponding provision of the Act.
2. In order to align the provisions of the Act with the Income-tax Act, 1961, section 393(4) [Table: Sl. No. 7, Column C (a)(i)] is proposed to be amended to provide that deduction of tax at source shall not be made on interest income (other than interest on securities) credited or paid to any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank).
3. The amendment will take effect from the 1st day of April, 2026.
[Clause 72]
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