Paytm Payments Bank Excluded from RBI Schedule 2026 | Tax Impact

What Happened?

Paytm Payments Bank Limited has been formally excluded from the Second Schedule to the Reserve Bank of India Act, 1934 vide official notification dated July 31, 2026, and published in the Gazette of India on September 7, 2026. This regulatory action means Paytm Payments Bank is no longer classified as a scheduled bank under RBI oversight. The notification carries significant implications for tax compliance, deposit treatment, and GST liability for businesses and individuals holding accounts with this entity.

Background & Legal Context

What is the Second Schedule to RBI Act, 1934?

The Second Schedule of the Reserve Bank of India Act, 1934 lists all scheduled commercial banks in India. Being listed in this schedule means the bank operates under full RBI regulation and supervision. This status is critical for:

• Deposit insurance coverage under the Deposit Insurance and Credit Guarantee Corporation (DICGC)
• Tax treatment of deposits and interest income
• GST compliance framework
• Business transaction classification for Income Tax purposes

Income Tax Act 2025 Implications:

Under the Income Tax Act 2025, the tax treatment of interest earned from scheduled banks versus non-scheduled entities differs significantly. Additionally, Section 80TTA (now part of the consolidated structure in 2025 Act) deals with interest income from savings accounts in scheduled banks. When a bank loses scheduled status, the tax nature of deposits and interest changes.

For Assessment Year 2026-27, any interest income earned from Paytm Payments Bank accounts will need to be reported differently in income tax returns. The bank's loss of scheduled status also affects:

• Section 44AB compliance: Businesses must track whether transactions with Paytm Payments Bank qualify as transactions with "scheduled banks" for cash transaction reporting
• TDS implications: Interest paid by non-scheduled entities may have different TDS treatment
• Business expense classification: Banking service charges and transaction fees treatment changes

GST Implications:

Under the GST regime, the classification of a financial entity affects:

• Banking service charges GST rate and input tax credit eligibility
• Whether the entity qualifies for exemptions available to scheduled banks
• Compliance requirements for businesses accepting payments through this bank

What Does This Mean for You?

For Individual Account Holders:

If you hold savings or current accounts with Paytm Payments Bank:

• Deposit Safety: Deposits up to ₹5 lakh remain insured under DICGC coverage if claims are filed within prescribed timelines. However, the status change necessitates immediate verification of your account status
• Interest Income Reporting: Interest earned on accounts opened before exclusion date (September 7, 2026) must be reported in ITR for AY 2026-27. Interest earned post-exclusion requires separate classification in your income tax return
• 80TTA Benefits: If you were claiming exemption under savings account interest provisions, you must now separately document whether Paytm Payments Bank interest qualifies for such exemption post-exclusion

For Small Business Owners & Traders:

If your business operates a current account or payment gateway with Paytm Payments Bank:

• Transaction Recording: All existing transactions remain valid for accounting purposes, but post-exclusion transactions with Paytm Payments Bank cannot be classified as "scheduled bank transactions" for compliance reporting
• Cash Transaction Reporting: Under Section 44AB (books of accounts), transactions routed through this bank post-September 7, 2026 must be clearly segregated. Banks and reporting entities must distinguish between pre- and post-exclusion transactions
• GST on Banking Services: GST on banking service charges changes from the concessional rate applicable to scheduled banks to the standard rate. This impacts your input tax credit calculations
• Working Capital Management: Funds held in this bank post-exclusion may face different treatment for short-term advances classification

For E-commerce & Payment Aggregator Businesses:

If your payment settlement accounts are linked to Paytm Payments Bank:

• Settlement proceeds post-September 7, 2026 require separate accounting treatment
• Working capital advances against such deposits face different compliance requirements
• GST compliance for payment processing fees changes

What Should You Do Now?

Immediate Action Items (October-November 2026):

• Verify Account Status: Contact Paytm Payments Bank and obtain written confirmation of your account status. Ensure all pending transactions are completed and documented
• Review Interest Certificates: Obtain Form 16A (TDS on interest) from the bank separately for interest earned before and after September 7, 2026. This segregation is critical for ITR filing
• Update Accounting Records: If you maintain business accounts, reconcile all Paytm Payments Bank transactions. Segregate pre-exclusion and post-exclusion transactions in your general ledger
• GST Compliance Review: Audit your input tax credit claims for banking service charges. Any credit claimed on GST paid to Paytm Payments Bank for services post-September 7, 2026 requires re-evaluation
• ITR Preparation: For AY 2026-27, maintain separate schedules for:
  • Interest income from Paytm Payments Bank
  • Banking service charges paid (pre- and post-exclusion)
  • GST paid on such charges
• Deposit Insurance Claim (if needed): If you have deposits exceeding ₹5 lakh, file claims with DICGC within the prescribed period (usually within two years from the bank's exclusion date)

For Chartered Accountants & Tax Professionals:

• Maintain alert system for client accounts linked to Paytm Payments Bank
• Prepare separate notes for interest income classification in ITR forms
• Review GST returns to recalculate input tax credit eligibility

Key Takeaways

• Effective Date: Paytm Payments Bank excluded from RBI Second Schedule effective September 7, 2026; impacts AY 2026-27 onwards
• Tax Treatment Change: Interest income from this bank post-exclusion loses scheduled bank classification; affects income tax filing and exemption eligibility
• GST Impact: Banking service charges now attract standard GST rate; input credit eligibility requires re-evaluation for businesses
• Deposit Safety: DICGC coverage remains up to ₹5 lakh; immediate verification of account status recommended
• Compliance Action: Segregate pre- and post-exclusion transactions in accounts; maintain documentary evidence for ITR and GST return filing

Important Reminder: This regulatory change affects thousands of account holders across India. Do not delay in reviewing your financial records and updating your tax compliance framework. Failure to properly segregate transactions and report interest income can lead to scrutiny during income tax assessment.

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