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Tax deduction on Interest income

Many of us keep our money either with banks or with cooperative credit societies, be it in fixed deposits or recurring deposits or in saving accounts. Not only this, we also invest in various Government run schemes like NSC, PPF and Senior Citizen Saving schemes. While making these investments everyone wants to plan these investments in such a manner so that no TDS (Tax Deducted at Source) is effected on our interest income.

Many of us keep our money either with banks or with cooperative credit societies, be it in fixed deposits or recurring deposits or in saving accounts. Not only this, we also invest in various Government run schemes like NSC, PPF and Senior Citizen Saving schemes. While making these investments everyone wants to plan these investments in such a manner so that no TDS (Tax Deducted at Source) is effected on our interest income.

In this article I shall discuss the various provisions related with TDS on such interest income which can help you understand when TDS will be deducted on your interest Income and when you will get your interest without deduction of TDS.

Interest Income on which deduction of TDS is not applicable

As per the provisions of Income Tax Act, there are certain investments/deposits on which no tax is required to be deducted without any limit of the amount of such interest.  Tax is not deducted on any interest paid on any savings account be it with any bank, or Co-operative credit society or Cooperative bank. Even in case of any cooperative society any interest paid to its share holders, the Cooperative society does not have to deduct any TDS whatever be the quantum of interest. In addition to the above no TDS is required to be deducted by the post office on any interest paid on any deposit with post office like saving accounts, recurring deposits, fixed deposits or monthly scheme schemes. Likewise no TDS is applicable on various saving certificates like Kisan Vikas Patra and Indira Vikas Patra. Since interest on PPF account is exempt from tax, hence it is not subject to any TDS.

Interest Income on which TDS is not deductible upto a certain limit

Unlike the benefits of no TDS without any limit available on the accounts and schemes discussed above, the Income Tax Act provides the benefit of no deduction of tax at source when the income is within a certain limit. For all the fixed deposit with banks, Credit societies, Cooperative banks etc., the payer will deduct tax at source if the income from such fixed deposit exceeds a limit of Rs. 10,000.  Please note that the limit of Rs. 10,000 shall be calculated with reference to interest on aggregate of all the fixed deposits made with the bank. However while calculating the limit of Rs.10,000, each branch shall be treated separately.  So if you earn interest less than Rs. 10,000 from each branch of the same bank though your overall interest on fixed deposit maybe higher than the limit of Rs. 10,000, no tax will be deducted by any of the branch.   Please note that though no tax is required to be deducted on various deposits with post office or various saving certificates without any ceiling, but there is one exception. In case interest on Senior Citizen Saving Scheme exceeds Rs. 10,000 in a year, the bank or post office will deduct TDS at the rate of 10%. However wef 01.04.2018 this limit of Rs 10,000 has been increased to Rs 50,000 only if the payee is senior citizen.

When TDS may be deducted at higher rates or nil rates on Interest Income

Though the rate of TDS is 10% on such interest income, the Income tax Act provides that a person who is entitled to receive such interest  which is subject to TDS can submit form No. 15G or 15H for no deduction of tax at source. In such cases the bank can pay you interest without deducting any tax from your interest even if the same exceeds the ceiling of Rs. 10,000.

One very important aspect which one needs to keep in mind is that even if you are fine with tax being deducted by the bank from interest being paid to you, even in such case you have to furnish your PAN number to the bank. If you fail to furnish the PAN number, the bank shall deduct tax at the rate of 20% instead of 10% generally applicable.

Even in the case where you are eligible to furnish either form No. 15G or 15 H, you should furnish your PAN number to the bank. If you fail to mention your PAN number in the form no. 15G or 15H,  the bank will deduct tax at the rate of 20% so instead of receiving interest without TDS you will be subjected to TDS at the rate of 20%.  Please ensure the correctness of the PAN number when you communicate the same to the bank. If the PAN number mentioned by you is found to be incorrect, the bank will be obliged to deduct tax at the rate of 20%

I am sure by now you have become aware of the intricacies of the TDS provisions as applicable to interest, thus you can plan your investment in such a way so as to minimize the incidence of TDS and escape from the hassle of having to claim the refund in case your income is below taxable limit or in cases when you want to receive the income without TDS legitimately for any reason.

Author is tax and investment expert and can be reached at jainbalwant@gmail.com @jainbalwant

(Republished with amendments)

Categories: Income Tax

View Comments (16)

  • Hi BISWESWAR GHOSH,

    4th interest portion will be from 02/02/14 to 31/03/14. TDS will be calculated even it is not paid and bank can pay it in May or Jun15 month. Once it is calculated then it will not be repeated in 2014-15. so only remaining interest portion(6906.25 - 4th interest till 31st March 14) will be applicable for 2014-15. so u have to pay remaining tax(20.9% or 10.6%) for the 4th interest amount which is still not paid to your account.

  • Sir,
    During the year 2013-2014. I have earned Rs 6127/- as interest from my saving account and Rs 49547/- from FDs in bank. Rs 5501/- has been deducted at source by the bank. Please tell me how much more tax is to be deposited by me? I fall under the 30% tax slab.

    Thanks

  • Dear Sir,

    Is income from FD of cooperative banks(holding shares too) exempt from Income tax and if so under which sub section of section 10?

    Thanks,

  • I want to share with you that that if I am a shareholder of a cooperative bank and having one share of the bank and i want to invest a FDR in the particular bank. They will deduct our tax or not. They told that being the members of the coop bank, the bank will not deduct any tds from their part and give me the full maturity amount. Is it clear in Income Tax Act or not.

  • I have a FD for 2yrs(12thJuly 2014-12th July2016) and I will earn Rs30000/- interest at the end of maturity. If I will not submit Form15G,I want to know whether the interest earn will be taxed during FY2015-16(Rs15000/-)and FY(2016-17) Rs15000/- or it will be taxed during FY 2016-17 Rs30000/.

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