Let’s take a look at the requirements of tax deductions at source for interest income received on deposits.
TDS or tax deductible at source is a method of tax collection introduced to ease the burden of tax collection on the income tax authorities and increase accountability of taxable transactions. Usually the concept of income tax involves two parties; the person who earns an income and the income tax authorities of the government. But under TDS, the government pulls in a third party into the equation as a ‘legal intermediary’ to achieve its objectives of increased accountability. And since the person who pays the income that is taxable not only knows all the details of the transaction but has access to the taxable income, the payer of the taxable income becomes the natural choice to act as the ‘legal intermediary’ for the purpose of implementing the concept of TDS deducted.
Under this concept, certain transactions require the person making the payment to deduct a percentage of the total amount before remitting the dues. The percentage of the deduction depends on the nature of the income. These percentages have been prescribed under various sections of the income tax act against the incomes specified under each section. This deducted amount is called tax deducted at source or TDS. Once the deduction is made, the legal intermediary, also known as the ‘deductor’, deposits the TDS with the government with the details of the transaction. The deductor has to make the TDS deposit online.
Applicability of TDS
The applicability of TDS is largely based on three factors.
One is the scale of the transaction. Transactions that are very large in nature usually attract the provisions of TDS. For instance, there is no TDS on the sale of goods. But if the sale value of the goods exceeds ₹50 lakhs will attract TDS.
The second factor is the nature of the transaction. Certain transactions are deemed important just for the record rather than the ease of tax collection. For instance purchase of the property. So no matter how big or small the value, any purchase of the property will attract TDS. Another such example is income from transport. Income from transport doesn’t require any tax deduction. But the details of the transaction must be reported in the relevant form.
The third factor is the frequency of the transaction. Incomes that have a consistent frequency are usually put under the ambit of TDS. Rent income and salaries are the most common example of this. And that brings us to the topic of this article. Interest income from deposits. Let’s take a look at how interest income fits into the ambit of TDS.
TDS on Deposits
Deposits are very safe and a fairly common investment. The most common types of deposits schemes that people invest in are:
- Bank Fixed deposit account: These are accounts offered by banks where you deposit a certain amount of money and lock it into the account for a fixed period of time. During the lock-in period, you will earn interest on the deposit at a certain rate, compounded annually. During this period, you can put in more money if you like and earn interest on that as well
- Bank Recurring deposit account: Like a fixed deposit account, this account is also for a limited period of time. But the difference is that you mandatorily have to make deposits at a consistent recurring frequency over the lock-in period of the deposit. As with a fixed deposit, you earn a rate of interest on the amount in the deposit account which is compounded annually
- Post office recurring deposit account: The same as the bank recurring deposit account but with the post office instead of the bank
- Post office time deposit account: The same as the bank fixed deposit account but with the post office instead of the bank.
As per section 194A of the Income tax act, TDS on interest earned on deposits is deducted at 10% of the interest earned and is deposited with the income tax authorities by making a TDS payment online.
However, if the person receiving the interest does not have a PAN, then the deduction will be 20%. And if the person is a non-resident, then the deduction will be 30%. For the purposes of income tax, a non-resident is a person who has been living outside the sovereign borders of India for a period greater than a total of 180 days in a financial year. So even if some has not lived outside India for 180 days continuously but has been out of India for 180 days overall, he or she will be considered a non-resident for taxation purposes. Also this definition is irrespective of nationality. So if a foreigner has been living in India for more than 180 days, he or she will not be considered a non-resident, even if they are not Indian citizens. So if they do not have a PAN, their deduction will still be 20% and not 30%.
Speaking of non-residents, sometimes a person might be living abroad for more than 180 days. But they may have a source of income in India. There is a deposit scheme for such incomes called an NRO account, which stands for Non resident ordinary. TDS on Interest from NRO accounts has to be deducted at 30%.
Exemptions
In a few cases, a person can get an exemption for his income from the tax deduction. Let us take a look at this.
- The first category of people exempt from TDS is the ones whose annual taxable income does not cross the basic limit of taxable income. Income tax is a slab rate based system. The percentage of tax applicable on the income depends on the amount of the income. But TDS is calculated at a standard rate. It does not look into the volume of the transactions. Since the tax deducted at source is meant to be income tax, this difference in the method of calculating will always have a disparity with the actual income tax that the deductee is liable to pay. So at the end of the year, when the actual income tax is calculated in the ITR, the deductee will take the total amount of the online TDS payment made against his income(s) during the year and compare it to the actual tax liability. If the tax liability is more than the total TDS payment online, then the deductee has to only pay the difference between the two. But, if the tax liability is less than the total TDS payment online, then the deductee can get exemption for the amount of online TDS payment exceeding the tax liability and claim a refund in the ITR. And if the tax liability is zero, then the person can apply for a full refund of the TDS payment online.
Sometimes, individuals are aware beforehand that they are not going to cross the minimum taxable income limit. This is especially true in case of interest on deposits where it is possible to calculate the interest amount in advance. So when a person knows that he or she is not going to cross the limit of taxable income in a year, he or she can stop TDS deductions on their interest by issuing a form 15G or 15H to the bank asking them to not deduct TDS on the payment. This especially helps in keeping the cash reserves up because you don’t have to wait till the end of the year to claim a refund.
- As far as companies are concerned, if the interest on deposits is less than ₹5,000 then TDS is not required to be deducted. Any amount exceeding ₹5,000 is subject to 10% TDS deduction. So the TDS will be calculated on the total amount of interest income earned on deposits minus ₹5,000.
- Senior citizens earning interest income less than ₹50,000 in a year are exempt from TDS deductions. So if senior citizens earning less than ₹50,000 must fill up form 15H / 15G and submit them to the bank for a waiver in TDS deduction.
- Interest on post office time deposits is also exempt from TDS. Form 15G or 15H is not necessary here as all deposits under this scheme have blanket exemption irrespective of the value of the money.
- Non residents who earn their income abroad have two deposit schemes in which they can deposit their foreign earnings and earn interest. These are Non-Resident External account or NRE and Foreign Currency Non-Resident account or FCNR. NRE is for depositing the foreign earnings in INR and FCNR, as the name suggests, is for holding the deposit in the foreign currency itself. Interest on both these accounts are exempt from TDS deductions.
Conclusion
There are many considerations and assumptions that are taken into account while formulating TDS policies so that taxation is applied in the most effective manner. This is why tax laws can seem complicated and that is why there are so many rules and exceptions to those rules. If TDS: https://incometaxindia.gov.in/Pages/Deposit_TDS_TCS.aspx is not deducted as per the rules, you may end up paying a penalty. At the same time if you don’t understand all the exemptions, then you may end up paying more tax than necessary. So it is best to consult a tax expert to understand the TDS framework. If you have any queries with regards to the applicability of TDS, get in touch with us today and get professional guidance from our team of tax experts.
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