The Income Tax Department has recently issued a clarification on the application of tax deducted at source () to interest earned from banks. Instead of clearing doubts, it has created more confusion. Many investors are now wondering whether higher TDS will be deducted and how their favourite fixed-income investment—Fixed Deposits (FDs)—will be taxed under the new rules.
What does the rule say?
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, under section 194A(3), banking companies are not required to deduct tax on such interest if it does not exceed the prescribed threshold (Rs. 50,000/Rs. 1,00,000, as applicable).
What changed in the new law?
Under the new Income-tax Act, 2025, TDS on interest is covered under Section 393(1), while the definition of “banking company” is given in Section 402.
Now, the confusion is that earlier law clearly included banks covered under Section 51 of the Banking Regulation Act, 1949. But that is not mentioned in the new Act.
What does clarification say and what does it mean?
It says that despite the absence of specific mention, there is no change in the order. By virtue of Section 51 of the Banking Regulation Act, 1949, such banks and institutions continue to fall within the definition of “banking company” under the new law as well. So that means:
- Banks and eligible banking institutions will not deduct TDS on interest income below the prescribed thresholds
- The scope of institutions covered remains effectively unchanged
- Depositors will not face additional TDS merely due to definitional changes in the new law
How the TDS on bank interest stands now:
Fixed Deposits:
TDS of 10% on FD interest will be deducted.
If the account holder fails to provide a PAN, it becomes 20%
TDS will not be deducted from the of senior citizens as long as it does not exceed ₹1 lakh during the financial year; for others, the general threshold is ₹50,000
Recurring Deposits
For the rules are similar to those of FDs
Savings Account:
Interest from savings accounts is generally exempt from TDS, but taxable up to ₹10,000 under section 80TTA.
How to avoid the TDS
If your total income is below the taxable limit, you can prevent TDS on fixed deposit interest by submitting Form 15G or Form 15H to your bank. Form 15H is meant for senior citizens aged 60 and above, while Form 15G is for individuals below 60.