Banks mandated to deduct TDS on annual interest income exceeding ₹50,000
All institutions covered under Section 51 of the Banking Regulation Act, 1949, are deemed “banking companies” for this purpose, even without explicit mention.
Under the new Income TaxAct, 2025, the government has clarified that all banking companies, including those governed by the Banking Regulation Act, 1949, and institutions covered under Section 51 of the Act, must deduct Tax at Source (TDS) on interest income once it crosses the prescribed thresholds.
Under the revised framework, interest earned on deposits in banks and post offices will be subject to TDS if the annual income exceeds ₹50,000 for ordinary depositors. For senior citizens, the threshold has been set higher at ₹1,00,000 per financial year. This ensures that small depositors and pensioners with modest savings are not burdened by tax deductions, while larger interest earners remain within the compliance net.
The change is anchored in Section 402 of the Income Tax Act, 2025, which standardizes the definition of “banking company” for tax purposes. By explicitly connecting the provision to the Banking Regulation Act, the government has removed ambiguity about which institutions are covered. This means that cooperative banks, regional rural banks, and other entities falling under the Act’s ambit will also be required to deduct TDS once depositors cross the threshold.
Under the Income-tax Act, 1961, the term “banking company” encompassed not only entities directly governed by the Banking Regulation Act, 1949, but also any bank or banking institution referred to in Section 51 of that Act—thereby extending the definition beyond explicitly named institutions.
For depositors, the practical implication is straightforward: if annual interest income remains below the threshold, no TDS will be deducted. So, once the limit is breached, banks and post offices will automatically deduct tax at source. Depositors can still claim refunds or adjust liability when filing returns, but the upfront deduction ensures that tax obligations are met in real time.
The Income Tax Department said that "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)."
Even if individual deposits generate less than ₹50,000, the combined total could trigger TDS. Senior citizens, however, benefit from the higher exemption limit, reflecting the government’s intent to provide relief to those dependent on fixed‑income savings.
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