CIRCULAR NO- 03/2010.
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.