New Delhi: The Income Tax Department has clarified how TDS (tax deducted at source) will apply to interest earned from banks under the new Income-tax Act, 2025. Many people were confused about whether banks would start deducting tax even on small interest amounts.
What was the rule earlier?
Under the Income-tax Act, 1961, banks did not deduct TDS on interest if it stayed below certain limits. These limits were Rs 50,000 or Rs 1,00,000, depending on the type of taxpayer, such as senior citizens or others.
This rule helped small depositors avoid unnecessary tax deductions.
What changed in the new law?
In the new Income-tax Act, 2025, TDS on interest is covered under Section 393(1). The definition of a “banking company” is now given in Section 402.
However, the new law does not clearly mention certain banks and institutions that were earlier included through Section 51 of the Banking Regulation Act, 1949. This created confusion about whether these banks would still get the same TDS exemption limits.
What has the government clarified?
The Income Tax Department has now cleared the confusion. It said that even though the wording has changed, the actual meaning remains the same.
Banks and institutions covered under Section 51 of the Banking Regulation Act will still be treated as “banking companies” under the new law.
What does this mean for depositors?
There is no change in how TDS works for bank interest:
- No TDS will be deducted if interest is below the set limits
- The same types of banks remain covered
- Small depositors will not face extra tax deductions
Why is this important?
This clarification is important because it avoids unnecessary confusion. Without it, some banks might have started deducting TDS even on small interest amounts, affecting people’s cash flow.
The update ensures a smooth transition to the new tax system and keeps rules simple for depositors.
