If your bank account earns interest from fixed deposit (FD), savings account or any other investment, then this question often arises whether the bank can deduct TDS on it or not. Recently, the Income Tax Department has clarified the rules on this subject, so that common people can easily understand when and how tax is deducted.
If you understand in simple language, the bank deducts TDS on your interest only when your annual interest income exceeds a certain limit. This rule was applicable earlier also and will continue in the same manner in the new law. That is, if your interest earning is limited, then the bank will not deduct TDS. But as soon as this limit is crossed, the bank automatically starts deducting tax.
According to the rules applicable till now, under Section 194A of the Income Tax Act, 1961, the bank has to deduct TDS on the interest received other than securities. However, a relief was also given in this. If the interest is less than a certain limit, the bank is not required to deduct TDS.
Apart from this, the definition of banking company was also kept quite broad. This includes not only big banks, but also some other financial institutions which provide banking services.
The new Income Tax Act, 2025 will come into force from April 1, 2026. In this, the rules related to TDS on interest have been kept in new sections. Now this provision comes under Section 393, whereas the definition of banking company is given in Section 402. However, it is a matter of relief for the common people that the basic nature of the rules has not changed much. That is, the process of deducting TDS on interest will remain almost the same as before, only the sections of the law and technical words have been changed.
Senior citizens often submit Form 15H at the beginning of the year to avoid TDS. This means that their total income does not come under the ambit of tax, hence the bank does not deduct TDS. But if your income increases in the middle of the year and the taxable limit is crossed, then you should immediately inform the bank about it. If you do not do this, you may have to face both tax and penalty later.
If your total tax liability exceeds Rs 10,000, then you are required to pay advance tax. Failure to do so may result in additional penalty in the form of interest. Therefore, it is very important to keep track of your total income from time to time.
When you file income tax return, it is important to declare not only the salary but also the interest income correctly. If you have paid less tax for any reason, it is better to pay it before filing the return. With this, any notice or problem can be avoided in future.
