The Finance Bill, 2026 proposes to exempt interest income paid or credited to co-operative banks from tax deduction at source (TDS) by amending section 393 of the Income-tax Act, 2025. Aligning the provision with the earlier Income-tax Act, 1961, the amendment clarifies that no TDS shall be deducted on interest (other than interest on securities) paid to any co-operative society engaged in the business of banking, including co-operative land mortgage banks. This change removes ambiguity and places co-operative banks on par with banking companies for TDS purposes. The proposal also rationalises TDS on interest awarded by Motor Accidents Claims Tribunals by fully exempting individuals and retaining the ₹50,000 threshold for others. Further, procedural amendments allow electronic furnishing of declarations through depositories for certain listed securities from a later date. The key exemption for co-operative banks will take effect from 1 April 2026 and apply from tax year 2026–27 onwards, easing compliance and improving liquidity for the co-operative banking sector under the policy framework of the Ministry of Finance.
No tax to de deducted at source in respect of interest income credited or paid to any cooperative society engaged in carrying on the business of banking (including a cooperative land mortgage bank)
Section 393(4) of the Act provides for the conditions where tax is not required to be deducted at source under corresponding provision of the Act.
2. In order to align the provisions of the Act with the Income-tax Act, 1961, section 393(4) [Table: Sl. No. 7, Column C (a)(i)] is proposed to be amended to provide that deduction of tax at source shall not be made on interest income (other than interest on securities) credited or paid to any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank).
3. The amendment will take effect from the 1st day of April, 2026.
[Clause 72]
Extract of Relevant Clauses of Finance Bill, 2026
Clause 72 seeks to amend section 393 of the Income-tax Act, 2025 relating to tax to be deducted at source.
It is proposed to make consequential amendment in sub-section (1) of the said section regarding cross reference.
Sub-section (4) [Table: Sl. No. 7] of the said section provides for condition where tax is not required to be deducted at source in respect of interest on income other than interest on securities referred to in sub-section (1) [Table Sl. No. 5(ii) and 5(iii)] of the said section.
It is further proposed to amend clause (a)(i) of sub-section (4) [Table: Sl. No. 7. C] so as to provide that interest income paid or credited to any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank) shall be exempt from applicability of deduction of tax at source.
It is also proposed to amend clause (b)(c)(iv) thereof so as to provide for non-applicability of tax to be deducted at source on the payment or credit of interest on the compensation amount awarded by a Motor Accidents Claims Tribunal, in case of deductee being an individual. For persons other than individuals, the earlier threshold of ₹50000 in the said clause shall continue.
These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-2027 and subsequent years.
It is also proposed to insert a new sub-section (6A) in the said section so as to allow depository to accept declaration from the assessee as per the provisions of section 393(6) of the said Act and provide it to the person responsible for paying income of the nature referred to in 393(1) [Table: Sl. Nos. 4(i), 5(i) and 7] within a fixed timeline. However, this additional option shall be available only to those investors who have held the securities in the depository as defined in section 2(e) of the Depositories Act, 1996 and where the securities are listed in a registered stock exchange in India.
It is also proposed to make consequential amendments in sub-section (7) of the said section.
These amendments will take effect from 1st April, 2027 and will, accordingly, apply in relation to the tax year 2027-2028 and subsequent years.
Extract of Relevant Amendment Proposed by Finance Bill, 2026
72. Amendment of section 393.
In section 393 of the Income-tax Act,––
(a) in sub-section (1), in the Table, in serial number (3), in Note 3, for the words, figures and brackets “serial number 3(iii)”, the words, figures and brackets, “serial number 3(i)” shall be substituted;
(b) in sub-section (4), in the Table, against serial number 7, in column C,––
(i) in clause (a), in sub-clause (i), after the words “banking company”, the words and brackets “or any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank)” shall be inserted;
(ii) in clause (b), in the long line, in sub-clause (c), for item (iv), the following item shall be substituted, namely:—
“(iv) on the compensation amount awarded by a Motor Accidents Claims Tribunal—
(A) to an individual; or
(B) to a person other than an individual, where the aggregate interest on such compensation does not exceed ₹ 50000 during the tax year;”;
(c) sub-section (6) shall be renumbered as sub-section (6) (a) thereof and after sub-section (6) (a) as so renumbered, the following clause shall be inserted with effect from the 1st April, 2027, namely:––
“(b) The declaration referred in clause (a) may also be furnished electronically to a depository, as defined in section (2)(e) of the Depositories Act, 1996, where––
(i) the income is from units, interest on securities or dividends, as the case may be, as referred to in section 393(1) [Table: 4(i), 5(i) or 7];
(ii) such units or securities are held with such depository; and
(iii) such securities are listed on a recognised stock exchange, in accordance with such procedure and manner, as may be prescribed.”;
(d) for sub-section (7), the following sub-section shall be substituted, namely:––
“(7) The person responsible for paying any income or sum of the nature referred to in sub-section (6) shall deliver or cause to be delivered, such declaration referred therein, received from the person, as specified in column (B) of the Table in sub-section (6) or the depository, to the prescribed income-tax authority, on or before the seventh day of the month immediately following the end of each quarter in which declaration is furnished to him as per sub-section (6).”.
