INDIA: More about TDS on Interest under SC Savings Scheme

CHENNAI (The Hindu), June 5, 2006: BUSINESS/Tax Forum: Questions & Answers Ministry's clarification requires to be dropped as it serves no purpose and only adds to the burden of post offices and banks -------------------------------------------------------------------------------- The limit of Rs. 5,000 itself is abnormally low requiring tax deduction in most cases with the least likelihood of liability. It puts a heavy burden on those below the taxable limit to file Form 15G or 15H. -------------------------------------------------------------------------------- The Union Finance Ministry has issued a clarification to the Reserve Bank of India and the Postal Department regarding tax deduction from interest on deposits under the Senior Citizens Savings Scheme, 2004. It reads as under: "Issues relating to TDS in respect of interest payable under the Senior Citizens Savings Scheme 2004 have been under correspondence with Department of Revenue, Central Board of Direct Taxes. Central Board of Direct Taxes has now clarified that since interest payment under Senior Citizens Savings Scheme, 2004 has not been exempted from deduction of tax at source, post offices and banks are required to deduct income-tax at source. It has further been clarified that the facility of furnishing Form No.15H (prescribed under the Income-tax Rules, 1962) is available only to a person (payee) resident in India and who is of the age of 65 years or more at any time during the previous year as under Income-tax Act, a person who has attained 65 years or more at any time during the previous year only is treated as a Senior Citizen". As senior citizens with income below Rs. 1.85 lakh pay no tax, there is no need for TDS for interest payments above Rs. 5,000. Even on the maximum investment of Rs. 15 lakh allowed under the scheme, the interest income in a year falls much short of the exemption limit for senior citizens. Even for senior citizens who have not reached 65 years, most of them, especially all women assessees, the interest income will fall short of the exemption limit. At any rate, such deduction goes against the assurance given at the time of launch of the scheme that there will be no TDS. Further, tax is being deducted by many post offices following the clarification at 20 per cent plus educational cess at two per cent, adding wrongly to 21 per cent. I believe that Form 15H can be filed by senior citizens who have reached 65 years, while others can file Form 15G but the clarification, by being silent on this, will subject this category of subscribers to unlawful deduction. Banks and post offices may not know that this is possible under the law. Self-declaration in Form 15H still refers to rebate, requiring amendment. A circular permitting use of the old form may be issued while advising post offices and banks to accept them even for past payments. Even otherwise, the deduction for amounts paid up to March 31, 2006 will create difficulties for the taxpayers in getting refund even where tax is payable, since they would have paid advance tax. Tax Forum is flooded with complaints from senior citizens against the clarification. Almost all the complaints refer to the assurance given at the time of the launch. But no reader has referred to any official clarification in this regard. Even so, the wide belief that TDS will not be applicable for this scheme has created discontent even among senior citizens who have taxable income and much more so for those who have no taxable income. Section 194A requires tax deduction from any payment of interest exceeding Rs. 5,000 per annum at 10 per cent. Tax deduction at 20 per cent is required only in the case of payment to a non-resident. The clarification reproduced in the reader's query does not also specify 20 per cent and hence post offices deducting tax on the basis of the clarification are not deducting tax at the correct rate. The payment limit for tax deduction was Rs. 400 when the minimum exemption limit for taxable income was Rs. 5,000 at the time TDS was first introduced with effect from April 1, 1968. The limit was enhanced to Rs. 1,000 with effect from June 1, 1975 when the minimum exemption limit was Rs. 6,000. It was enhanced to Rs. 2,500 from June 1, 1987 when the minimum limit was Rs. 18,000. It was increased to Rs. 5,000 with effect from June 1, 2000 when the minimum exemption limit was Rs. 50,000. The minimum exemption limit is now Rs. 1 lakh and for most senior citizens covered by the scheme it is Rs. 1.85 lakh. The limit of Rs. 5,000 itself is abnormally low requiring tax deduction in most cases with the least likelihood of liability. It puts a heavy burden on those below the taxable limit to file Form 15G or 15H and on the disbursing officials to deduct and monitor cases requiring non-deduction. The minimum payment for TDS has not kept pace with the minimum exemption limit. Those with taxable income have the responsibility to pay advance tax, where such liability exceeds Rs. 5,000, voluntarily without notice. Failure invites a stiff interest at 15 per cent per annum (1.25 per cent for every month) under Sec. 234B and further interest at the same rate for deferment of instalments of advance tax under Sec. 234C. These provisions are sufficiently discouraging so that there is no risk involved in dispensing with the requirement of TDS. As pointed out by the reader, the right of senior citizens aged below 65 to file Form 15G to avoid TDS is overlooked, while pointing to the ineligibility for 15G for them. Besides this omission, there is also a mistake in the Circular in barring Form 15H (or for that matter 15G) for non-residents, because it overlooks the amendment to Sec. 197A by insertion of sub-section (1A) making the facility of self-declaration of non-liability available to "any income of the nature referred to" inter alia, referring to Sec. 194A to enable the non-resident assessees (other than a company or a firm) eligible for such declaration with effect from June 1, 1994. Form 15G was consequently amended to remove the declaration that the declarant is a resident during the year, but only requiring information whether a declarant is a resident or not for purposes of rate of tax (10 or 20 per cent). Form 15G follows Form 15H. The clarification requiring tax deduction even for past payments as understood in some quarters goes against the law because the requirement should only be for current payments. Even if TDS was required in the past, the law does not provide for making good the omission by deduction from current payments. It is the payer alone who is responsible for payment of tax failed to be deducted, but Explanation to Sec. 191 spares the deduction from tax, if such tax has meanwhile been paid by the payee, so that the payer's responsibility is only for interest and any possible penalty, if omission is wilful, under Section 201. Taking all these factors into consideration, the "clarification" requires to be dropped since it serves no purpose and places considerable workload on post offices and banks in collecting Form 15G and 15H in cases of assessees who will not be liable. The few, who are liable, are bound to pay tax as advance tax and are even otherwise traceable, so as to enable enforcement of collection. S. RAJARATNAM Copyright © 2006 The Hindu