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.

However, this was creating problems for banks using Core-Branch Banking Solutions (CBS), which enables customers to access their accounts from any branch.

The Indian Banks' Association in a representation to the Income Tax department had said that for 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 actually credited to the depositor's account either at the end of the financial year or at periodic intervals or on maturity of the deposits.

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.