TDS - Too Tedious to decipher?

Kiran TelangMrs. Limaye recently received a letter from the income tax department regarding tax payment outstanding for her fixed deposits (FD). She had retired about three years back and had invested her retirement proceeds into fixed deposit with a co-operative bank. At that time the bank employee suggested that she become a member of the co-operative bank to avoid tax deduction at source (TDS) on her fixed deposit. Mrs. Limaye readily agreed as she thought this would spare her some efforts on paperwork. Her main source of income is pension. She had been filing her tax returns all these years based on her pension income received. The pension was of course being received after TDS and the same was reflected in her form 26AS. So why did she receive a tax outstanding notice?The bank employee was right in suggesting that she can avoid TDS by becoming a share holder (member) of the co-operative bank. As per Income Tax Circular No. 9/2002 dated 11-09-2002, a member is eligible for exemption on TDS under Sec 194A ss3(v) if (s)he has subscribed to at least one share of the co-operative bank and must be entitled to participate and vote in the General Body meetings and/or Special General Body Meetings of the co-operative bank.What Mrs. Limaye did not know was that she will have to include the interest paid as a part of her income under the Section ‘Income from Other Sources’ and she will need to consider it for taxation. Depending on her total income and investments, her tax slab will be decided. She will have to accordingly pay the tax on her own as ‘Advance Tax’. Advance tax dates and slabs are fixed. She will need to pay the tax whether the interest accrues or gets paid out, depending on whether she has taken a cumulative or interest payout option on her fixed deposit. The role of Form 26ASThis form is a consolidated tax statement issued under Rule 31 AB of the Income Tax Rules to PAN Holders. This form reflects:a Tax deducted at source (TDS)b. Tax collected at source (TCS)c. Advance tax/self assessment tax/regular assessment tax deposited by the tax payer Since the bank did not deduct any TDS, it obviously did not show in her form 26AS. Hence she continued filing returns based on what was shown in her form 26AS- the TDS on her pension income which was actually only a part of her income, if we consider the interest earned on the fixed deposits. The bank did not issue her an interest certificate which could be said to be a mistake on part of the bank. Had she received an interest certificate, she would have probably thought of asking someone what to do about it.No TDS does not mean non-taxableVery often no TDS is taken to mean no-tax liability, which is a big mistake. This happens with commonly available products such as recurring deposits and interest on savings account. Even in case of postal schemes like time deposits (fixed deposits), NSC, KVP, RD, MIS etc., TDS is not applicable. This provision was probably made to benefit small depositors who have incomes below the taxable threshold and hence would be better off without getting into the tangle of filing returns to claim back the TDS as refunds. For most urban population with higher income levels, these exemptions would not be of much use, as their income levels would make interest earned on these products taxable in their case.Currently banks do not deduct TDS on interest upto Rs.10,000 per person per year per branch. You might be spreading your fixed deposit holdings across several banks/branches to avoid TDS under this rule. It will be useful only if your total income is below taxable limit i.e. currently Rs.3 lakhs for senior citizen (Rs.2.5 lakhs for non-senior citizen). If your income exceeds this amount in a year, you are anyway liable to pay tax. Of course there are exemptions available under Sec 80 C which will allow you to be in the non-taxable bracket even if you earn more than Rs.3 lakhs in a year. If your income is anyway below taxable limit, you might as well submit for 15G (for non-senior citizens) or form 15H (for senior citizens), to avoid TDS by the bank. A noteworthy clause in submission of forms 15G/H is that you have to mandatorily quote your PAN on the form. A non-disclosure of PAN would lead to TDS at 20% instead of the standard 10% which you are trying to avoid in the first place.IF you consider a 9% quarterly compounding FD for a period of one year, the interest on a Rs.1 lakh FD per year will amount to Rs.9300. Even if you time the fixed deposit in a manner that you can invest a slightly higher amount to stay within the exemption limits for the financial year, you will not go much higher. Now imagine if you are investing your retirement proceeds in FD, sheer number of FDs that you will have to handle will be exhausting. It is not worth the effort. Especially if at the end of it all, you are still liable to pay tax on account of your other incomes like say pension or rental etc. It will be worth your while to try looking at the bigger picture instead of trying to save TDS by splitting your FDs. You would need to create a proper retirement plan which is tax efficient and offers you requisite liquidity, safety and growth to keep up with your living needs and more. Financial planners offer services specifically suited to create such plans.As for Mrs. Limaye, she will have to go through the entire rigmarole of answering to the tax authorities, filing a revised return and pay the outstanding tax with interest and penalty.