Income Tax Dept Provides Clarification Regarding TDS Exemption on Interest Payments by Banking Institutions

The Income Tax Department has given clarification on the TDS exemption on Interest paid by a banking company or banking institution.

Under Section 194A of the Income-tax Act, 1961, tax must be deducted at source (TDS) on interest payments other than interest on securities. However, banks do not need to deduct this TDS if the interest paid is below the limit of Rs 50,000 or Rs 1,00,000, depending on the case. This exemption is given to banks under section 194A(3) of the Income Tax Act.

Earlier, the definition of “banking company” under the Income Tax Act, 1961, included not only banks governed by the Banking Regulation Act, 1949, but also other banks or banking institutions mentioned in Section 51 of that Act.

In the Income Tax Act, 2025, the TDS provisions for interest are now in Section 393(1) [Table: Sl. No. 5(ii)], and the definition of a “banking company” is given in Section 402. This definition refers only to banks governed by the Banking Regulation Act, 1949. The earlier phrase mentioning a bank or a banking institution referred to in section 51 of that Act has been removed in the new law.

However, according to Section 51 of the Banking Regulation Act, 1949, banks and banking institutions that fall under this category are still considered “banking companies” under the new Income-tax Act, 2025. Therefore, the banks still get the exemption on interest payments below the prescribed threshold even without explicit mention.

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…

— Income Tax India (@IncomeTaxIndia) March 30, 2026