Earning income is good – paying taxes is better … have you ever found some one saying that ? Perhaps not. People would want to prevent paying tax to the extent possible – some by tax evasion (which is illegal) and other by tax planning. There is another category of people who generally are not cognizant of the fact that tax is being deducted from their hard earned money even though they are not required to pay any tax. You must be wondering that what I wrote sounds contradictory – if one is not required to pay tax, why would tax be deducted from their earnings.
TDS or Tax Deducted At Source
One of the most common ways a person earns income (other than via salary and business) is via interest on deposits from Banks. Banks are required to deduct an upfront tax under section 194A of Income Tax Act. The three categories of interest being earned from a bank are :
1. Interest on Saving account – no TDS is deductable on interest provided to such accounts even though such interest income is chargeable to tax. A new tax rebate was recently introducted in 2012 whereby saving bank interest income upto Rs. 10,000 is not subject to tax.
2. Interest on Recurring Deposit (RD) – just like Saving bank account, no TDS is deductable on RD interest even though RD interest is taxable.
3. Interest on Fixed Deposits (FD) – FD interest like other forms of interest is taxable and is liable for TDS deduction by Banks.
A bank would deduct TDS if total interest paid or accrued to a customer in a year exceeds Rs. 10,000. It is important to note :
a. Accrued Interest – even though the interest is not paid, it would be subject to TDS. For example, if you have opened a 5 year FD of Rs. 200,000 @ 10% interest whereby interest shall be paid on maturity. Even though you shall not be paid interest on a yearly basis, TDS shall be deducted on the interest accrued. In this case, 200,000 @ 10% = Rs. 20,000 shall be interest for the first year. Out of Rs. 20,000, 10% TDS (i.e. Rs. 2000) shall be deducted and remaining Rs. 18,000 shall added to your FD account. On maturity, you would find that the total interest paid out to you shall be reduced by around 10% owing to TDS.
b. A Customer – Before Core Banking Solution (CBS) was implemented in the banks to integrate all branches across the country via computerisation, a branch was not aware of customer details of any other branch. So for example if a customer ‘A’ opened one FD in SBI’s Branch 1 of Delhi city and another FD in SBI’s Branch 2 of same city (Delhi), both Branch 1 & Branch 2 would not be able to identify the total interest being paid out to Customer ‘A’. However, with CBS implementation, all branches of a bank across the country can now identify if Customer A has any other FD in any other branch of the same bank and hence deduct TDS if total interest payouts to Customer A exceed Rs. 10,000 per year.
But What if I am not Subject To Tax ??
This is a million dollar question ! Often the people who are not subject to Tax get penalised with mandatory TDS if the total interest income being paid out to them exceed Rs. 10,000 from the same bank. This causes unnecessary hardships whereby the investor would now need to file a tax return in order to claim a refund of the TDS. In order to prevent such hardships, Income Tax Act has got provisions whereby a person can submit a declaration with the respective Bank in prescribed Forms (15G and 15H). Once the bank has received such declaration, they would not deduct TDS FOR THAT YEAR ONLY.
It is important to note that this not a one time exercise for the duration of the Fixed Deposit. The form needs to be submitted every year to prevent the bank from deducting TDS for that year. I believe that the rationale for this form to be submitted on a yearly basis is – the income level of a person can change from one year to another year and it may not be practical to declare your income levels for next couple of years. Lets discuss these two forms individually.
Form 15 G (Free Download)
This form is meant for general investors who want to declare to the bank that their income from all sources is less than minimum amount subject to tax. At the time of writing this article, this amount is Rs. 200,000.
Form 15H (Free Download)
This form is similar to Form 15G but is meant for investors who are more than 65 years of age. This form also requires the investor to declare that his total income is less than minimum amount subject to tax (i.e. Rs. 250,000).
Other Measures to Prevent TDS
The law requires a bank to deduct TDS from a customer’s income if the total interest paid / payable by THE bank for FD is greater than Rs. 10,000. However, if the interest paid / payable by other banks to the same customer is greater than Rs. 10,000, the bank is not liable to deduct TDS as long as interest paid by the bank is within Rs. 10,000. This forms a genesis to prevent TDS being deducted on your interest income. If you perceive that the total FD interest shall be more than Rs. 10K, then you may want to split your FDs with multiple banks. For example, if you have Rs. 300,000 which you want to invest in FD. If you open a FD with a single bank, the interest payable would be approx Rs. 25-30K per year and hence inviting TDS deduction (as interest is more than 10K). To prevent TDS, you may want to split it with 3 different banks (not 3 different branches of the same bank).
Money is hard earned and hence every attempt should be made to plan tax and take all opportunities to prevent any tax deductions, specially even more when a person is not required to pay any tax. One such mode is via Form 15G and 15H which are required to be submitted on an annual basis to prevent tax being deducted where an investor is not required to pay any tax. Investors should really make sure that every year they visit the branch of their banks and submit such a form if they are not required to pay any tax and the total interest being paid out or accrued to them from the bank exceeds Rs. 10,000 per year.