NEW DELHI: Days after the Budget announced that tax
deducted at source (TDS) will also apply to recurring deposits, banks are
witnessing a rush of investors closing down their deposits prematurely.
Though it is fully taxable, the interest from
recurring deposits is exempt from TDS. This only applies to interest from fixed
deposits if the income exceeds Rs 10,000 in a year. The new rule is proposed to
come into force from June 1, so investors are rushing to close their recurring
deposits before the taxman gets whiff of their wealth.
"Premature closure of my recurring deposit
will fetch me a lower interest rate. But at least there won't be a tax
deduction," said an investor at a public sector bank branch in Delhi.
Banks may see more premature closures of deposits as more investors become
aware of the new rule.
It is not difficult to see why investors are
panicky. Since the TDS is credited to the permanent account number of the
investor, not mentioning the income in the tax return can lead to problems. The
computer-aided scrutiny system of the tax department could pick up the mismatch
in the tax credit and income declared by the assessee, which can lead to a
detailed scrutiny by the tax authorities. If tax has been deducted at source
but returns have not been filed, the tax department may want to know why.
"The new rules on TDS will help nail tax
evasion and improve tax collections," declares Sudhir Kaushik, co-founder
and CFO, Taxspanner.
TDS rules for fixed deposits are also being
changed. Till now, this deduction kicked in only if the income from fixed
deposits made in a particular bank branch exceeded the threshold of Rs 10,000
in a financial year. It was common for investors to open fixed deposits at
multiple branches of their bank to avoid TDS. The budget has proposed that TDS
should be levied if the combined interest income from FDs in all branches of a
bank exceeds Rs 10,000 in a year.
The third major change is that co-operative bank
deposits will also be subject to TDS. This was more or less expected.
Last year, the Karnataka Income Tax Tribunal had
ruled that if the interest exceeded Rs 10,000 in a year, tax must be deducted
at source. Following this, several cooperative banks had received notices from
the Income Tax Department asking them to deduct tax for the year 2013-14.
Investors should note that the 10% tax deduction is only an interim tax. The
actual tax depends on the income of the individual (see table).
If one is not liable to pay tax because the total
income is below the basic exemption limit, one can submit a declaration
to the bank using Form 15G or 15H. These have to be submitted at every branch
of the bank where one has a deposit. However, submitting a false declaration
can have serious repercussions.
"Giving incorrect information to avoid TDS
amounts to tax evasion. A penalty of up to Rs 1 lakh can be slapped in such
cases," warns Kaushik.
