How the changes in TDS Rules will impact you?

There is a change in TDS Rules for RD (Recurring Deposit) and FD (Fixed Deposit) from 1st June, 2015. Not many people are aware of the change in TDS rules. It’s a biggest misconception in India that if the TDS (Tax Deducted at Source) is not deducted then the tax liability is NIL. It’s a huge tax leakage for Income Tax Department. The second misconception is contrary to 1st i.e. if the TDS is deducted then there is no further tax liability. This is true for taxpayers in 10% income tax bracket but not for taxpayers in 20% and 30% tax bracket. The third misconception is that interest from Fixed Deposit and Recurring Deposit is clubbed under deduction of Rs 10,000 available u/s 80TTA. To clarify, only the cumulative interest on savings account/s of up to Rs 10,000 is allowed as a deduction u/s 80TTA. The interest earned over and above Rs 10,000 is taxed as per the income tax slab of the taxpayer. Definition of Savings account include

1. Savings Bank Account

2. Co-operative Bank Account

3. Post Office Savings Scheme

The main reason for this confusion is that on Fixed Deposits, TDS @ 10% is deducted only if the interest earned on FDs is more than Rs 10,000. The taxpayer gets confused between deduction of Rs 10,000 on Savings Account Interest and TDS relaxation on FD interest of up to Rs 10,000. Let me clarify that the interest earned from Recurring Deposit and Fixed Deposit is FULLY TAXABLE whether TDS is deducted or not. It is taxed as per the income tax slab of the taxpayer. If the total interest income from FD/RD is below Rs 10,000 and TDS is not deducted on the same. In this case, the taxpayer has to include it in Income from other sources & pay tax on the same.

In order to fix most of these anomalies and tax leakages, the government has started or is planning to deduct TDS on most of the financial products. Last year, TDS was introduced for maturity proceeds of Life Insurance policies w.e.f 1st Oct, 2014. To further strengthen the income tax system and to fix the leakages, Govt has introduced major changes in TDS rules w.e.f 1st June, 2015. Now It will be more difficult to evade tax. In my opinion, besides introducing new TDS rules, it is important to create awareness on TDS rules. There is a section of the taxpayers, whose intent is not to evade tax but due to ignorance about TDS rules they make short payment of income tax. Let’s check out the changes in TDS rules.

TDS on Interest Income from Recurring Deposit

From the tax liability perspective, there is NO CHANGE. As i mentioned that 100% interest Income from Recurring deposit is taxable. From, 1st June, 2015 if the interest income from RD is more than Rs 10,000 then TDS @ 10% will be deducted. Interest Income will be cumulative interest from all the Recurring Deposits with the Bank. Therefore, if you have 3 RDs with 3 different branches of the same bank and cumulative interest is more than Rs 10,000 then TDS will be deducted proportionately. This is one of the major change in TDS rules as the recurring deposit is most popular savings scheme in small towns.

In case, the depositor has not provided PAN then TDS @ 20% will be deducted. Let’s see after TDS deduction what will be additional tax liability of people in various income tax brackets.

Non-Taxable Income: TDS deducted will be refunded. Alternative you can submit form 15G (Non-Senior Citizens) or Form 15H (For Senior Citizens) with the bank. Bank will not deduct TDS if Form 15G / Form 15H is submitted. Please note that these forms should be submitted at each and every branch where the deposits are being maintained. Normally people submit at one branch assuming the bank will consider the same for all the deposits across branches.

10% Income Tax Bracket: NIL Tax Liability

20% Income Tax Bracket: 10.30%

30% Income Tax Bracket: 20.60%

TDS on Interest Income from Fixed Deposit

TDS rules for Fixed Deposit is also changed. Till now people were playing smart to avoid TDS deduction. They used to open Fixed Deposit in different branches of the same bank. To avoid TDS, FD interest at each bank branch was intentionally kept below Rs 10,000 in a financial year. Depending on ROI and tenure, FD amount was reverse calculated so that FD interest should be below Rs 10,000. With PAN in place, it is not difficult for banks to find out cumulative interest income from FD’s across the bank branches. From 1st June, 2015 if the cumulative interest income from FDs across all the branches of a bank exceeds Rs 10,000 then TDS will be deducted @ 10%.

Withdrawal of TDS Exemption from Co-operative Bank deposits

Not many people are aware that till now Bank Deposits of Co-operative Banks were exempted from TDS. There is a change in TDS rules, from now onwards the co-operative bank deposits will be treated at par with PSU and Private Banks. In short, TDS will be deducted if the interest income exceeds Rs 10,000.

New TDS Rules on Withdrawal of Provident Fund

After the successful computerization of EPFO accounts, it was widely anticipated that TDS will be applicable on withdrawal of provident funds. Till now TDS was not applicable on premature withdrawal of PF i.e. before 5 years of continuous service. If the PF is transferred from Employer A to Employer B then the continuous service period starts from the date of joining of Employer A. For example, if employee left job of Employer A in 3 years and that of Employer B in 2.5 years then period of continuous service will be 5.5 years. The taxation of PF withdrawal is a bit complex topic which i will discuss in the future post. The new TDS rules in this regard will be effective 1st Jun, 2015. The summary of TDS rules on PF withdrawal is as follows.

1. TDS will be applicable on PF withdrawal before 5 years of continuous service.

2. Rate of TDS will be 10%

3. New TDS rules will not be applicable if the withdrawal amount is less than Rs 30,000.

4. Tax Free PF Withdrawal is allowed in following cases

             (a) Employer has discontinued/closed the business

             (b) Employee is ill and cannot continue service on health grounds

             (c) Any other reason which is beyond the control of an employee

5. If the PAN is not provided at the time of withdrawal then TDS rate will be 34.60%

Change in TDS rules – Life Insurance Proceeds

There is a small change in the provision of TDS deduction @ 2% which was introduced last year. Currently, Life insurance company has to deduct TDS if the total payment to insured is more than Rs 1,00,000 during FY including Bonus. The change from 1st June, 2015 is that if the income of the insured is non-taxable then he/she can submit form 15G/15H with the insurance provider. In this case, TDS will not be deducted.

Concluding Remarks: As an honest taxpayer you need not worry about the new TDS rules. Please don’t go by the negative posts on new TDS rules especially related to TDS on Recurring Deposit. The objective of govt is to increase the base of income taxpayers and to stop tax evasion. It’s a good sign for honest taxpayers as our Finance Minister also said that with an increase in tax base, Income tax rates will come down. Tax evaders beware as the new TDS rules are only a beginning.

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