Bank Lending & Deposit Rates September 2026 - Tax Impact

What Happened?

In September 2026, the Weighted Average Lending Rate (WALR) on outstanding rupee loans of Scheduled Commercial Banks (SCBs) declined marginally to 8.96 per cent in August 2026 from 8.97 per cent in July 2026. Simultaneously, the Weighted Average Domestic Term Deposit Rate (WADTDR) on outstanding rupee term deposits fell to 6.56 per cent in August 2026 from 6.58 per cent in July 2026. These rate movements have significant implications for interest income taxation and loan interest deductions under the Income Tax Act 2025.

Background & Legal Context

Under the Income Tax Act 2025, interest income earned from bank deposits and interest paid on loans are key components of taxable income and deductible expenses respectively. The relevant provisions include:

• Section 56 (Income Tax Act 2025) - Income from other sources, which includes interest on deposits, fixed deposits, and savings accounts
• Section 37 - Deduction for business expenditure, which includes interest paid on borrowed capital used for business or profession
• Section 194A - Tax Deducted at Source (TDS) on interest payments by banks at 10% (or as per slab rate) on deposits exceeding ₹40,000 per annum
• Section 80C - Deduction for various investments and savings instruments

The declining lending rates reflect the monetary policy stance and have direct bearing on:

• Borrowers: Lower interest burden means reduced deductible interest expense under Section 37
• Depositors: Declining deposit rates mean lower interest income subject to taxation under Section 56
• TDS Obligations: Banks must comply with Section 194A TDS requirements based on actual interest credited

The 1-Year Marginal Cost of Funds based Lending Rate (MCLR) of SCBs declined to 8.61 per cent in September 2026 from 8.70 per cent in August 2026. This is relevant for borrowers whose loan interest rates are linked to MCLR, as lower MCLR translates to reduced EMIs and consequently lower interest deductions.

What Does This Mean for You?

For Depositors (Savers/Investors):

• The declining deposit rates of 6.56% on outstanding term deposits mean your interest income for AY 2026-27 will be lower compared to previous years
• Interest income from fixed deposits, savings accounts, and recurring deposits will be taxed as per your applicable income tax slab rate under Section 56
• If your total interest income exceeds ₹40,000 per annum, banks will deduct TDS at 10% (or your applicable rate) under Section 194A
• Senior citizens (60+ years) have a higher TDS exemption limit of ₹50,000 for interest income
• Lower deposit rates mean you should explore other investment avenues for better returns or tax-efficient instruments

For Borrowers (Business Owners/Home Loan Seekers):

• The declining WALR of 8.96% on outstanding rupee loans benefits existing borrowers through lower EMI payments
• Fresh loan rates are at 8.61%, which is relatively competitive; if your business or home loan is linked to MCLR at 8.61%, you can expect monthly savings
• Lower interest paid means reduced deductible interest expense under Section 37 for business/profession income
• For self-employed professionals and business owners, declining interest rates reduce the quantum of interest deduction available during AY 2026-27
• External Benchmark Rate (EBLR) linked loans (68.2% of floating rate loans) move faster with policy changes than MCLR-linked loans

For Salaried Employees (Home Loan Borrowers):

• Home loan interest is deductible under Section 24 of Income Tax Act 2025 up to ₹2,00,000 per annum
• Declining lending rates mean your monthly EMI burden reduces, but the interest component for tax deduction also decreases
• You must maintain proper documentation of interest paid (annual statement from bank) for claiming deduction under Section 24

For Businesses Claiming Interest Deduction:

• Interest paid on borrowed capital for business purposes is fully deductible under Section 37
• With WALR declining to 8.96%, your interest expense burden reduces, affecting your tax deduction quantum
• You must maintain loan agreements, bank statements, and reconciliation statements as audit trail for income tax purposes

What Should You Do Now?

Immediate Actions for AY 2026-27:

• Verify Interest Income: Collect bank statements and interest certificates (Form 26AS) showing interest credited on all deposits, savings accounts, and recurring deposits. Report total interest income in your ITR under Section 56.
• Check TDS Compliance: Ensure your bank has deducted TDS correctly under Section 194A on interest exceeding ₹40,000 (or ₹50,000 for senior citizens). If TDS is under-deducted or not deducted, request your bank to correct the same before filing ITR.
• Loan Interest Documentation: If you have business loans or professional borrowings, collect all loan statements showing monthly/quarterly interest paid. Maintain these for Section 37 deduction claim.
• Home Loan Interest Claim: Salaried employees with home loans should maintain annual interest certificates from lenders and claim deduction under Section 24 (capped at ₹2,00,000).
• Review Loan Linkage: Check whether your floating-rate loan is linked to MCLR (29.6% of outstanding floating loans) or EBLR (68.2%). EBLR-linked loans adjust faster to rate changes.
• Rebalance Portfolio: With deposit rates declining, evaluate shift towards tax-efficient instruments like ELSS mutual funds (Section 80C), National Savings Certificates (Section 80C), or Senior Citizen Savings Scheme (for 60+ years).
• ITR Filing Checklist: Ensure your ITR for AY 2026-27 correctly reflects all interest income and loan interest deductions, supported by bank statements and loan documents. Any mismatch will trigger scrutiny notice under Section 142(1).

Key Takeaways

• Declining Rates Impact Both Sides: Lower lending rates (8.96%) benefit borrowers through reduced EMIs, but lower deposit rates (6.56%) reduce interest income for savers—both affect AY 2026-27 taxation.
• TDS Compliance Critical: Banks must deduct TDS under Section 194A on interest income; ensure correct TDS is deducted and reflected in your tax records to avoid ITR mismatches.
• Interest Deduction Limits Apply: Home loan interest is capped at ₹2,00,000 per annum (Section 24); business interest is fully deductible (Section 37) but must be properly documented.
• MCLR vs EBLR Difference: 68.2% of loans are EBLR-linked (adjust faster) and 29.6% are MCLR-linked (adjust slower); know your loan linkage to predict rate changes and EMI impact.
• Documentation is Non-Negotiable: Maintain all bank statements, loan agreements, interest certificates, and TDS receipts for AY 2026-27; income tax department cross-verifies with banks under Section 285BA (Form 61A data).

Final Word: These rate changes are subtle but materially impact your tax liability for AY 2026-27. Whether you are a depositor earning interest or a borrower paying interest, proper documentation and timely reporting are essential. Any mismatch between your ITR and bank records (which are auto-matched by the income tax department) can trigger notice under Section 142 or even penalty under Section 271G.

Need expert help with this? EaseValue CAs in Jaipur — WhatsApp 63677 44602