The Finance Ministry has clarified that no income tax is to be deducted if banks only a provision has been made for interest on fixed deposits and banks have actually not paid it to the depositor, a Finance Ministry official said.
Till now the situation was such that tax was to be deducted even if banks made a provision for interest payment.
This process had become problematic for banks which used Core-Branch Banking Solutions (CBS) which allowed customers to access their accounts from any branch.
The Indian Banks' Association had sent a representation to the Income Tax department saying that in case of 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 finally credited to the customer's account either at the end of the financial year or at periodic intervals or when the maturity of the deposit takes place.
This matter was taken into consideration by the Central Board of Direct Taxes to come up with an appropriate solution.
The Finance Ministry official clarified that CBDT clearly said that since the interest was not credited to the depositor's account on a daily or monthly basis; so tax need not be deducted for the same.
"In such cases, tax shall be deducted at source on accrual of interest," the Board said.
Income tax is charged at the rate of 10 per cent on interest income of more than Rs 10,000 in a year.