TDS on Interest Payments: Calculation and Reporting Methods

What is TDS on Interest Payments?

TDS on interest means that the payer deducts tax before paying or crediting the interest to the recipient. It mainly applies to interest other than interest on securities , such as interest on fixed deposits , recurring deposits, company deposits, unsecured loans and certain business borrowings.

The purpose is simple: interest income is taxable for the recipient, so the law requires certain payers to deduct tax at source and deposit it with the government. The recipient can later claim this TDS as credit while filing the income tax return .

An individual or HUF is generally required to deduct TDS on interest only when they fall within the specified business or professional audit-linked conditions. A personal loan interest payment by a normal individual is not automatically covered merely because the amount is high.

TDS Threshold Limits for Interest Payments

These threshold limits generally apply to the aggregate interest paid or credited during the financial year or tax year, as applicable, and not to each separate transaction. For interest on compensation awarded by the Motor Accident Claims Tribunal, the threshold is checked with reference to the amount paid during the year.

Also, for banks and co-operative banks using core banking solutions, the ₹50,000/₹1,00,000 threshold is checked bank-wise and not branch-wise.

TDS Rates on Interest Payments

For resident payments, surcharge and cess are generally not added to the basic TDS rate under this section. For non-residents, surcharge and health and education cess may apply depending on the rate, status and treaty position.

How TDS on Interest is Calculated

Example 1: FD interest for a non-senior citizen

Example 2: Senior citizen FD interest

Since the senior citizen’s FD interest is below the ₹1,00,000 TDS threshold, the bank is not required to deduct TDS under the normal threshold rule. However, the interest may still be taxable in the ITR depending on the taxpayer’s total income, tax regime and available deductions such as Section 80TTB .

Example 3: Interest paid by a company on unsecured loan

When is TDS Deducted?

TDS on interest is deducted at the earlier of these two events:

1. When interest is credited to the payee’s account
2. When interest is actually paid

Credit to a suspense account or similar account is also treated as credit for TDS purposes . This means TDS may apply even before the recipient physically receives the money, if the interest has already been credited in the payer’s books.

Common Interest Payments Covered Under TDS

• Fixed deposit interest
• Recurring deposit interest
• Company deposit interest
• Interest on unsecured business loans
• Inter-corporate deposit interest
• Interest paid by firms or companies to outside lenders
• Certain interest payments by co-operative banks
• Interest on compensation, subject to specific rules and threshold

The key test is not just the name of the payment. The real nature of the payment, the payer, the recipient and the applicable threshold must be checked.

The Income-tax Act, 2025 continues to provide no-deduction cases for certain interest payments, including interest paid to specified institutions, certain co-operative society payments, and deposits other than specified time deposits. However, interest paid by a firm to its partner should be explained carefully, as partner payments are separately covered under the partner-payment TDS rule , under which TDS may apply once the ₹20,000 threshold is crossed.

TDS on FD and RD Interest

FD and RD interest are among the most common cases where TDS applies. From 1 June 2015, interest on recurring deposits is also treated under the time deposit framework for TDS threshold purposes. 

For banks using core banking solutions, interest from different branches is clubbed under the same bank before applying the threshold. Therefore, splitting FDs across branches of the same CBS-enabled bank will not necessarily avoid TDS.

Joint FD treatment

For a joint FD, banks usually deduct TDS using the PAN of the first or primary holder. However, the actual taxability of interest should follow the real ownership of funds. If the second holder contributed the funds, the final income-reporting position may differ from the TDS-reporting position. This should be reconciled carefully while filing the ITR.

TDS on Savings Account Interest

Form 15G, Form 15H and Form 121

A taxpayer can submit a declaration to avoid TDS if the tax on estimated total income is nil and other conditions are satisfied. Form No. 121 has been introduced as the new declaration form replacing Forms 15G and 15H under the Income-tax Rules, 2026. It is meant for eligible taxpayers whose tax liability is nil, so unnecessary TDS can be avoided.

Practical points

• Submit the declaration before interest is credited.
• Submit it separately to each bank or payer.
• Renew it every year.
• Do not submit it if your estimated tax liability is not nil.
• NRIs should not use these resident declaration forms for NRO interest.

Lower or Nil TDS Certificate

If TDS at the normal rate is higher than the taxpayer’s actual expected liability, the taxpayer can apply for a lower or nil deduction certificate. Form No. 128 is used to apply for lower or nil deduction of income tax under the Income-tax Act, 2025. Once approved, the certificate can be verified electronically and the payer can deduct tax at the rate mentioned in the certificate.

Section 194A applies only to resident payees. If interest is paid to a non-resident, Section 195 must be checked instead. For NRIs, the TDS rate depends on the type of interest, residential status, applicable domestic law, surcharge, cess, and DTAA benefit. NRO FD interest is generally taxable in India, while NRE FD interest may be exempt if the account and residential status conditions are satisfied.

A DTAA benefit should not be applied casually. The NRI typically needs to provide documents such as Tax Residency Certificate, Form 10F,
and other declarations required by the bank or payer.

TDS Deposit, Return Filing and Certificate

TDS deposit due date

TDS return filing

Form No. 140 is the quarterly statement for non-salary resident TDS under the Income-tax Rules, 2026. It covers non-salary resident payments including interest other than interest on securities. 

TDS certificate

Form No. 131 is the new TDS certificate for non-salary TDS under the Income-tax Act, 2025. It must be generated in TRACES after the relevant quarterly TDS statement has been filed and processed.

What to Do If TDS is Already Deducted

If TDS has already been deducted, it is not a loss. It is a tax credit. The recipient should:

1. Check Form 26AS , AIS or the relevant updated tax credit statement.
2. Match the TDS amount with the certificate issued by the deductor.
3. Report the full interest income in the ITR.
4. Claim the TDS credit while filing the return.
5. If TDS is more than the actual tax liability, claim the excess as refund.

For example: Kavita earns ₹60,000 as FD interest and the bank deducts ₹6,000 as TDS. If her final tax liability for the year is only ₹1,000, she can claim ₹5,000 as refund while filing her ITR.

Penalties for Non-compliance

The Income Tax Department explains that failure to deduct tax may attract 1% interest per month, while failure to deposit tax after deduction may attract 1.5% interest per month. 

Common Mistakes to Avoid

• Do not check each FD separately if the bank aggregates deposits under the same PAN. Review the total interest from the same bank or payer before deciding whether TDS applies.
• Form 15G, Form 15H or Form 121 should be submitted before interest is credited. If TDS has already been deducted, the usual route is to claim credit or refund while filing the ITR.
• Resident and non-resident interest payments are handled differently. Before paying interest to an NRI, check Section 195, DTAA documents, TRC, Form 10F and the bank or payer’s compliance process.
• A mismatch between the TDS certificate and AIS/Form 26AS can delay tax credit. The deductee should ask the deductor to correct PAN, challan or return details before filing the ITR.
• Businesses paying interest to multiple lenders should not rely only on spreadsheets. Missed thresholds, incorrect PAN details, late challans or wrong return forms can create avoidable compliance issues.

Conclusion

TDS on interest is a routine but sensitive compliance area because it affects banks, businesses, lenders, deposit holders and senior citizens. The most important points are simple: identify the correct payer and payee, apply the right threshold , deduct on time, deposit TDS correctly, file the right return and issue the right certificate.

The biggest practical takeaway is that TDS is only a tax credit, not the final tax. Interest income still has to be reported in the ITR. If excess TDS is deducted, the taxpayer can claim a refund. If no TDS is required because the final tax liability is nil, the taxpayer should submit the correct declaration or lower deduction certificate before the interest is credited.

Businesses using accounting software such as BUSY can reduce manual errors by tracking interest payments, TDS rates, due dates, challans, certificates and return data in a more organised way.