The Income Tax Department of India has issued a clarification on March 30, 2026 regarding the applicability of Tax Deducted at Source (TDS) on interest income under Section 194A of the Income-tax Act, 1961, particularly in the context of banking institutions. The clarification aims to provide greater certainty on threshold limits and the scope of entities covered under the provisions, while also outlining corresponding changes under the Income-tax Act, 2025.
Under the existing provisions of Section 194A of the Income-tax Act, 1961, TDS is required to be deducted on interest income other than interest on securities. However, banking companies are exempt from deducting TDS where the interest amount does not exceed the prescribed threshold limits, currently set at ₹50,000 or ₹1,00,000, as applicable.
The clarification further elaborates on the definition of a “banking company” under the 1961 Act. It includes not only those banking companies governed by the Banking Regulation Act, 1949, but also extends to any bank or banking institution referred to in Section 51 of that Act, thereby broadening the scope of entities covered under the exemption provisions.
With the introduction of the Income-tax Act, 2025, the corresponding provision relating to TDS on interest is contained in Section 393(1) [Table: Sl. No. 5(ii)]. The definition of “banking company” has now been specifically provided in Section 402 of the new Act. As per this definition, a banking company refers to entities governed by the Banking Regulation Act, 1949. Notably, the earlier explicit reference to banks or banking institutions under Section 51 of the Banking Regulation Act has not been retained in the wording.
However, it has been clarified that, by virtue of the continuing applicability of Section 51 of the Banking Regulation Act, 1949, such banks and banking institutions continue to fall within the ambit of “banking company” even under the Income-tax Act, 2025. This ensures continuity in interpretation and avoids any unintended narrowing of scope.
Accordingly, it has been affirmed that such banks and banking institutions will not be required to deduct TDS on interest payments where the amount does not exceed the prescribed threshold limits under the Income-tax Act, 2025. This clarification reinforces consistency in tax treatment and provides relief to both financial institutions and depositors.
The clarification is expected to ensure uniform implementation of TDS provisions and reduce ambiguity, thereby facilitating ease of compliance within the banking sector.
The Clarification can be accessed at: https://a2ztaxcorp.net/wp-content/uploads/2026/03/Income-Tax-30.03.2026.pdf
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