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. 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 CBS software 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.

Please refer to the income tax department notification for more details.