Are you receiving emails or telephone calls
from banks advising you to invest in recurring deposits because there is no tax
deducted at source (TDS) in this case? Remember, such investments aren’t
tax-free.
No TDS merely means the bank will pay you the
entire interest amount without forwarding the tax on it to the government.
However, the fixed deposit holder will have to include this interest income in
her/his total income and pay tax on this, according to her/his tax
bracket.
“There is a common misconception if there is no
TDS, it is tax-free. But whether it is recurring deposit, post-office deposits,
national savings certificates, or any other savings, if there is no TDS, the
interest income is taxed. The only difference between these and fixed deposits
is the bank or post office will not deduct tax at source,” says Sanjeev Gokhale,
a chartered accountant.
Banks offer the same rate of interest on fixed
deposits and recurring deposits. For fixed deposits, you invest the money in a
lump sum, while in the case of recurring deposits, you invest once every month.
This instrument is encouraged as a way of instilling discipline among
investors.
The difference is in the case of fixed
deposits. If the interest exceeds Rs 10,000 in a financial year, the bank will
deduct 10 per cent tax before crediting the interest to the account. However,
this is not the only tax the deposit holder is liable to pay. “This is another
common misconception. Many people think they have to pay the remaining 20 per
cent tax while filing tax returns. Or, he/she can also pay through advance tax,”
Gokhale says.
A few months ago, it was reported the income
tax department had issued notices to several people who had not filed returns.
Among them were those who had received interest income of more than Rs 50,000.
If you receive such a notice, you will have to pay the tax, as well as interest
for the delay. The interest is one per cent a month from the last date of filing
returns (July 1). The penalty for not filing returns is also charged at the same
rate.
So, whether you invest in fixed deposits,
recurring deposits or tax-saver post office schemes, remember to include the
interest income while filing tax returns. The only case in which you don’t have
to pay income tax on fixed deposits is if you have no other source of income and
your income is below the threshold taxable limit. For this, you have to file
Form 15G, stating you have no taxable income. Senior citizens have to file Form
15H. In many cases, senior citizens feel if they have done this, they are not
liable to pay tax. But if you have two or three fixed deposits in separate banks
and you submit a Form 15G or 15H in all the banks, you will have to pay tax if
the total interest from all the fixed deposits exceeds the taxable income limit,
says chartered accountant Arvind Rao.
“Since last year, while submitting Form 15G,
deposit holders have to state the deposits they have with other banks. So, banks
have to report two types of interests—one on which TDS has been deducted and the
other on which it hasn’t,” he says
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