Beware of side effects of TDS on Interest of Deposits in Co-op. Banks w.e.f. 1st June, 2015

Krishna (Fictional Character): Arjuna, from 1^st June, 2015 the Government has introduced the provision of TDS Deduction on the Interest on Fixed Deposits of Co-Operative Banks. There are many Co-operative Banks in function all over India, from Small Towns to Big Cities. Persons of every hierarchy in the society have Accounts in the Co-operative Banks. Generally, due to no TDS deduction and more Interest Rate on Deposits in Co-operative banks than the Nationalized Banks, many prefer deposits in the Co-operative Banks in rural areas. But due to this stringent provision of TDS, Cooperative Banks and Depositors will have to face many problems from 1^st June, 2015. Through this, the Government will collect more Taxes and Tax Evasion will be avoided. It may be one of tool to garner revenue.

Arjuna: Krishna, When is TDS deducted on the Interest on Deposit?

Krishna: Arjuna, According to Section 194A of Income Tax Act, if interest on the deposit exceeds Rs. 10, 000/- in a year then the Bank has to deduct TDS @10% on such Interest. This provision has an exception before 1^st June, 2015 that no TDS will be deducted on the Interest if deposit were made in Co-operative Bank and if the depositor is the Member of Bank. But now from 1^st June, 2015 the provision of TDS deduction on the interest of cooperative banks is being introduced by the Government. E.g. If fixed deposit of amount Rs.1 lakh is kept in Co-operative Bank for tenure of 1 Year or more having interest rate 12% then the Interest will be Rs. 12,000/- and TDS @ 10% will be Rs. 1, 200 that means Interest will be credited Rs 10,800 in the Bank Account of depositor after deducting TDS of Rs.1, 200.

Arjuna: Krishna, What is the Taxpayers’ Responsibility in this and is there any way out for the Taxpayer to get rid of this TDS on Interest Income?

Krishna: Arjuna, the Taxpayer should submit a copy of PAN Card to Bank. Because in TDS return PAN of the Taxpayer is mentioned and through this the taxpayer gets tax credit. If depositor does not have PAN then TDS will be deducted @ 20%. It is the responsibility of Taxpayer to file Income Tax Return after Year end. While filling Income Tax Return Taxpayer should verify form 26 AS for TDS and Interest Income on Deposit. Income Tax Department has given following options to Taxpayer for no deduction or low deduction of TDS:

• Form 15 G/H: If Taxpayer has no Taxable Income that means the Interest and other Income is below the Basic Exemption limit of Income Tax slabs then he should submit Form 15 G/H to the Bank in which his deposits were kept. On the basis of this Form, Bank will not deduct TDS on the Interest of the depositor. e.g. If in the financial year 2015-16 interest of taxpayer is Rs. 150,000 and that means below Basic Exemption Limit of Rs. 2, 50,000 then he can submit Form 15 G to Bank and no TDS will be deducted on his Interest.
• Certificate of section 197 of Income Tax Act: If expected tax on the income of the taxpayer is less than 10% then before start of a year he can file an application to income tax department for less deduction of TDS and if the application is accepted by department then Income Tax department will give Certificate in which TDS Rate is mentioned. So bank will deduct TDS at the rate mentioned in the certificate. E.g. If Income Tax of any Taxpayer is 5% of Income then the Taxpayer may submit an Application consisting Details of Income and Tax calculations on it to Income Tax Department along with the Application and if it is accepted then Bank will deduct TDS at low rate as mentioned in the Certificate.

Arjuna: Krishna, What is the responsibility of Banks with regard to this provision of TDS on the Interest on Deposit?

Krishna: Arjuna, cooperative banks will have to collect PAN of the deposit holder before 1^st June 2015. Due to this KYC documents of many account holders will have to be collected and so many defaulters will come to notice. Every Month Banks have to Deduct TDS on the Interest on Deposits in all branches. The Bank will have to file TDS return after paying TDS to Government. Banks have to give form 16A (TDS Certificate) to all the Depositors and have to submit Form 15 G/H to Income Tax department.

Arjuna: Krishna, What will be the effect of the provision of TDS on Interest on Fixed Deposits in Co-operative Banks to an ordinary person?

Krishna: Arjuna, many rural taxpayers may come in trouble due to this provision of TDS. By this Provision, income tax department will have the information of taxpayers’ fixed deposit. While filling income tax return, taxpayer has to mention the details of deposits, interest on it and has to claim TDS credit on it. Further the taxpayer who never files income tax return has to file return by showing interest income so as to claim refund of TDS. The Biggest difficulty will arise to the taxpayer who has never shown the deposits in the books of accounts of previous year and has to show it in the current year. Further on Income tax departments enquiry justification of source of the income will have to be given. e.g. If the taxpayer has a Deposit of Rs. 10 lakh and it is not shown in the books of accounts of the previous year then he has to show that in the books of the current year and also has to give Explanation for the source of Income of the deposit.

Arjuna: Krishna, What are its effects on the Co-operative Banks?

Krishna: Arjuna, many taxpayers were making deposits in Co-operative Banks as TDS was not deducted. But due to this provision there might be reduction in the deposits in Co-operative Banks. Further if Banks did not follow the provisions then they will be held liable and bank will have to pay interest and penalty on the TDS.

Arjuna: Krishna, What should one learn from this?

Krishna: Arjuna, Law is same for all. Earlier the provision of interest on TDS was applicable only to the Nationalized Banks but now it has become applicable to Co-operative Banks too. Many taxpayers, for saving income tax were making deposits in Co-operative Banks under different names. But now this will not be possible. All money will be exposed due to this provision. The tax evader will now have to give justification for the source of income of such deposits. Rural depositors and tax payers may be affected due to this provision. TDS is tip of an ice burg, Deposit is the real ice burg, in which depositor may get buried, if income tax law is not complied with.