Earning interest from bank and post office deposits? TDS on interest rules clarified by tax dept

The income tax department has clarified how tax deducted at source (TDS) will apply to interest earned from banks under the Income Tax Act, 2025, addressing confusion around the definition of “banking company.” The clarification was shared via a post on X (formerly Twitter).

What the rule says

Under Section 194A of the Income Tax Act, 1961, TDS applies to interest income (other than interest on securities). However, banks are not required to deduct TDS if the interest amount does not exceed the prescribed limits, ₹50,000 for most individuals and ₹1,00,000 for senior citizens.

What has changed in the new law

Under the Income Tax Act, 2025, the provision for TDS on interest has been moved to Section 393(1). Meanwhile, the definition of a “banking company” is now provided under Section 402 of the new law.

Scope of ‘banking company’ under the old law

Under the 1961 Act, the definition of “banking company” was broader. It included not just banks covered under the Banking Regulation Act, 1949, but also certain other banks and institutions referred to under Section 51 of that Act.

What created confusion

In the new law, the wording has changed. Section 402 defines a banking company but does not explicitly mention those additional institutions referred to earlier. This led to doubts about whether such entities would still qualify for TDS exemption thresholds.

Why was this clarification issued?

To address these concerns, the tax department clarified that even without explicit mention, such banks and institutions are still covered under the definition. This is because Section 51 of the Banking Regulation Act already brings them within the broader framework of “banking companies.”

No change in TDS exemption applicability

What this means for depositors

For depositors, this means there is no change in how interest income is taxed at the threshold level. Small depositors and senior citizens will continue to benefit from the existing limits.

What is the TDS limit for general and senior citizens?

What interest income attracts TDS?

TDS applies to interest income from several other sources, including:

• Bank fixed deposits (FDs), post office time deposits

• Savings accounts: Interest earned on bank savings accounts above the threshold

• Recurring deposits (RDs): Interest earned on recurring deposits in banks and post offices.

• Post office schemes excluding PPF and KVP: Interest from schemes like Monthly Income Scheme (MIS), Time Deposits, etc.