Bank need to deduct tds on accrual of interest not on mere Provisioning of the same

Mar 9, 2010

No income tax at source will be deducted if banks 

have only made a provision for interest on fixed deposits

and not actually paid it to the depositor, the Finance Ministry

has clarified. Until now, tax was supposed to be deducted

by banks even if only provisioning was made for interest payment.

However, this was creating problems for banks using
Core-Branch Banking Solutions (CBS), which enables
customers to access their accounts from any branch.

The Indian Banks’ Association in a representation to the
Income Tax department had said that for banks using the
CBS software, interest payable on fixed deposits is
calculated generally on a daily or a monthly basis but is
parked in the provisioning account for monitoring only.

The interest is actually credited to the depositor’s accoun
either at the end of the financial year or at periodic intervals
or on maturity of the deposits. The matter was considered
by the Central Board of Direct Taxes to plug this loophole.

According to a Finance Ministry official, CBDT clarified
that since no credit is given to the depositors while
calculating interest on fixed deposits on daily or monthly
basis in the CBSsoftware used by banks, tax need not be
deducted at source on such provisioning of interest.

“In such cases, tax shall be deducted at source on accrual
of interest,” the board clarified, according to a source.
 
Income tax is charged at the rate of 10 per cent on
interest income of more than Rs 10,000 in a year.