New Delhi, April 28 -- The Income Tax Department has recently issued a clarification on the application of tax deducted at source (TDS) to interest earned from banks. Instead of clearing doubts, it has created more confusion. Many investors are now wondering whether higher TDS will be deducted and how their favourite fixed-income investment-Fixed Deposits (FDs)-will be taxed under the new rules.

Under the provisions of Section 194A of the Income-tax Act, 1961, tax is required to be deducted at source on interest other than interest on securities. However, under section 194A(3), banking companies are not required to deduct tax on such interest if it does not exceed the prescribed threshold (Rs. 50,000/Rs. 1,00,000, as applicable).

Under ...