Time to review tax deduction at source provisions on bank and NBFI deposits

The National Board of Revenue (NBR) has prescribed tax deduction at source (TDS) on interest earned from savings and fixed deposits under the Income Tax Act 2023, as amended by the Finance Ordinance 2025.

Under the current provisions, TDS is 20 percent for trusts, associations of persons (AOPs), and companies, while a 10 percent rate applies to other persons, including individuals and funds. Additionally, where a depositor is required to submit a tax return but fails to provide proof of submission, an additional 50 percent TDS is imposed.

While the law is clear in principle, its practical implementation by banks and non-bank financial institutions (NBFIs) remains challenging due to several ambiguities and operational difficulties.

Lack of clarity for joint deposit accounts

Joint deposit accounts are common in Bangladesh. During encashment, uncertainty arises when one accountholder can provide proof of tax return submission while another cannot.

Similar confusion exists when one depositor is legally required to submit a tax return and the other is not. As the NBR has not issued specific guidance on the treatment of joint or multiple account holders, banks and NBFIs often face compliance risks when determining the applicable TDS rate.

Encashment of deposits held by deceased persons

Section 194 of the Income Tax Act places responsibility on legal representatives for taxes payable by a deceased person. However, in practice, successors rarely submit tax returns on behalf of deceased depositors.

During encashment, they often request exemption from the additional TDS on humanitarian grounds. To maintain customer relationships, banks and NBFIs sometimes accommodate such requests despite uncertainty regarding compliance with Section 102. Clarification from the NBR is necessary to ensure consistent treatment of such cases.

Unjustified TDS rates

Non-profit entities such as NGOs, cooperatives, charitable organizations, and many religious institutions formed as trusts or AOPs are subject to a 20 percent TDS rate on deposit interest.

Although the Finance Ordinance 2025 exempts religious organizations from tax return submission requirements, the 20 percent TDS rate remains unchanged. This creates an undue burden, particularly for orphanages, autism support organisations, and small rural religious institutions that depend primarily on public donations and maintain deposits with banks or NBFIs.

Similarly, private universities, colleges, and medical institutions are subject to a 15 percent tax rate on taxable income, yet TDS on their deposit interest remains 20 percent, increasing to 30 percent when proof of tax return submission is unavailable. Such disparities result in inequitable tax outcomes and warrant reconsideration.

Uncertainty regarding previous exemption circulars

Prior to the Income Tax Act 2023, the NBR issued various exemption circulars and SROs under Section 53(F) of the Income Tax Ordinance 1984. Following the replacement of that provision by Section 102 of the new Act, the NBR has not clarified whether those exemptions remain valid.

Consequently, many organisations continue to claim benefits under old exemption circulars, while banks and NBFIs face difficulties in determining their applicability under the current law. Clear guidance from the NBR would ensure consistent compliance across the financial sector.

Potential misuse of the reduced TDS rate for funds

The Finance Ordinance 2025 continues to allow a reduced TDS rate of 10 percent for “Funds.” However, some autonomous bodies and local authorities attempt to obtain this benefit by maintaining deposits under names such as Trust Fund, Depreciation Fund, Sinking Fund, or Endowment Fund without providing sufficient evidence that they qualify as funds under the law.

When Banks and NBFIs seek supporting documentation, customers often claim that similar treatment is available elsewhere, creating pressure to apply the reduced rate. The NBR should establish clear qualification criteria and strengthen monitoring to prevent misuse of this concession.

Time for Review

For sustainable economic development, savings should remain within the formal banking system. To encourage deposits and ensure voluntary tax compliance, TDS rates on deposit interest must be equitable, practical, and aligned with the nature of the depositor.

At the same time, the NBR should issue clear operational guidance on Section 102 to address the real-life situations encountered by banks and NBFIs. Such measures would reduce compliance uncertainty, promote fairness, and strengthen confidence in the tax system.

The writer is a chartered accountant.