Clarification on TDS on interest u/s Section 194A in the case of banking institutions.
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, in terms of provisions of section 194A(3), banking companies are not required to deduct tax where such interest does not exceed the prescribed threshold (Rs. 50,000/Rs. 1,00,000, as applicable).
2. In the Income-tax Act, 1961, the scope of “banking company” included not only banking companies to which the Banking Regulation Act, 1949 applies, but also “any bank or banking institution referred to in section 51 of that Act.”
3. Under the Income-tax Act, 2025, the corresponding provision relating to TDS on interest is contained in Section 393(1) [Table: Sl. No. 5(ii)], and the definition of “banking company” has been provided in Section 402 of the Act.
4. The definition of “banking company” in Section 402 of the Income-tax Act, 2025 refers to a banking company to which the provisions of the Banking Regulation Act, 1949 apply. The earlier phrase “including any bank or banking institution referred to in section 51 of that Act” has not been included
5. By virtue of the extant Section 51 of the Banking Regulation Act, 1949, such banks and banking institutions fall within the meaning of “banking company” under Section 402 of the Income-tax Act, 2025, even without explicit mention.
6. Thus, such banks or banking institutions will not be required to deduct income-tax on the amount below the threshold provided in Section 393(1) [Table: Sl. No. 5(ii)] of Income-tax Act, 2025.
How much TDS is deducted?
TDS usually applies to payments made by banks, financial institutions, companies, and individuals where interest is credited or paid on deposits, loans, or advances.
The tax is generally deducted at a rate of 10%, but if the recipient fails to provide a valid Permanent Account Number (PAN), the rate increases to 20%. This section is only applicable to a resident. Thus, the provisions of section 194A are not applicable in case of payment of interest to a non-resident.
However, if your total taxable income is below the exemption limit, you can avoid the 10% TDS (or 20% if no PAN is provided) deducted by the bank. In order to do so, one can submit the Form 121 (which has replaced the previous Form 15G and Form 15H).
Payments made by institutions to non-residents are also covered under TDS mechanism. However, tax in such a case is to be deducted as per Section 195.