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    Mar 3, 2010

    TDS ON FIXED DEPOSIT CIRCULAR


    CIRCULAR NO- 03/2010.
    F.No.275/66/2007-IT (B)
    Government of India
    Ministry of Finance
    Department of Revenue
    Central Board of Direct Taxes
    ……
    New Delhi, the 2nd March, 2010.
    Sub: Tax Deduction at Source on payment of interest on time deposits under
    Section 194A of the Income Tax Act, 1961 by banks following Core-
    Branch Banking Solutions (CBS) software – reg.
    …..
    As per provisions of section 194A of the Income Tax Act 1961, income tax
    has to be deducted at source at the time of credit of interest income to the account
    of the payee or at the time of payment thereof in cash or by issue of a cheque or
    draft or by any other mode, at the rates in force if such interest amount exceeds
    specified limit. Further, Explanation to section 194A states that “for the purpose of
    this section, where any income by way of interest as aforesaid is credited to any
    account, whether called ‘Interest payable account’ or ‘Suspense Account’ or by
    any other name, in the books of account of the person liable to pay such income,
    such crediting shall be deemed to be credit of such income to the account of the
    payee and the provisions of this section shall apply accordingly”.

    2. Representations have been received from Indian Banks Association (IBA)
    seeking clarification regarding deduction of tax at source from payment of interest
    on time deposits by banks using Core-Branch Banking Solutions (CBS) software.
    In case of banks using CBS software, interest payable on time deposits is
    calculated generally on daily basis or monthly basis and is swept & parked
    accordingly in the provisioning account for the purposes of macro-monitoring
    only. However, constructive credit is given to the depositor’s / payee’s account
    either at the end of the financial year or at periodic intervals as per practice of the
    bank or as per the depositor’s / payee’s requirement or on maturity or on
    encashment of time deposits; whichever is earlier.

    3. The matter has been considered by the Board. Explanation to section 194A
    was introduced with effect from 1.4.1987 by the Finance Act, 1987 to plug the
    loophole of avoiding deduction of tax at source by crediting interest in the books
    of accounts under accounting heads ‘interest payable account’ or ‘suspense
    account’ instead of to the depositor’s / payee’s account. Therefore, the
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    Explanation is not meant to apply in cases of banks where credit is made to
    provisioning account on daily/monthly basis for the purposes of macro monitoring
    only by the use of CBS software.

    4. In view of the above position, it is clarified that since no constructive credit
    to the depositor’s / payee’s account takes place while calculating interest on time
    deposits on daily or monthly basis in the CBS software used by banks, tax need
    not be deducted at source on such provisioning of interest by banks for the
    purposes of macro monitoring only. In such cases, tax shall be deducted at source
    on accrual of interest at the end of financial year or at periodic intervals as per
    practice of the bank or as per the depositor’s / payee’s requirement or on maturity
    or on encashment of time deposits; whichever event takes place earlier; whenever
    the aggregate of amounts of interest income credited or paid or likely to be
    credited or paid during the financial year by the banks exceeds the limits specified
    in section 194A.

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