False declarations for TDS avoidance can result in penalties and interest charges.

Like most of us, the Government doesn’t like to wait for its money. It wants us to pay tax dues or at least a part of it as and when we get our incomes.

So, the law requires many income providers to pay us only the net amount after deducting taxes. Thus, your employer deducts tax from your monthly salary if your estimated annual taxable income exceeds the threshold of exempt income.

Banks deduct tax from income on fixed deposits if interest accrued or paid exceeds Rs 10,000 a year. Similarly, if rent paid exceeds Rs 1,80,000 a year, tax is deducted. Tax is also deducted on professional fees, commission and other forms of income such as lottery earnings. You can claim tax deducted at source (TDS) as tax paid while filing returns.

Different rates

Depending on the nature of income, TDS rates vary. On salaries, employers adjust the rate such that the entire tax liability of the employee is deducted by the year-end. On fixed deposit interest, banks charge TDS at 10 per cent. But if the deposit holder does not provide his permanent account number, banks deduct tax at 20 per cent. On rent, the TDS rate is 10 per cent. But if the rent payer is an individual, he need not deduct tax.

Avoiding TDS

Now consider Vinay, a senior citizen, whose only income is bank fixed deposit interest of Rs 1,50,000 a year. Since the interest exceeds Rs 10,000 a year, the bank will deduct tax of Rs 15,000 (at 10 per cent) and pay him the balance of Rs 1,35,000. This puts Vinay at a disadvantage.

Tax has been deducted though his total income is well below the tax exempt income limit for senior citizens (Rs 2,50,000). He will have to claim the TDS amount as refund in his tax return. This will take time and meanwhile reduce his ability to spend. To avoid TDS in such situations, the law allows senior citizens (aged 60 years and more) to submit Form 15H to the bank. This lets them claim exemption from TDS if their taxable income is below the tax threshold. Persons other than senior citizens in situations such as this can submit Form 15G and avoid TDS on their bank deposits. These forms have to be submitted each year to claim exemption from TDS.

For optimal benefit, it is better to submit the forms at the beginning of the year itself. Similar rules for other types of income help avoid tax deduction when total income is below the tax threshold. False declarations for TDS avoidance can result in penalties and interest charges.

Misconceptions about TDS

Not all income is subject to TDS. But this does not mean that such income is not subject to tax. For instance, tax is not deducted on interest earned on bank recurring deposits and savings bank accounts. Also, if interest on bank fixed deposits is less than Rs 10,000 a year, there is no TDS. But the tax-payer has to declare these incomes in his tax return and pay tax on it, if applicable.

Also, just because tax has been deducted, it does not mean that the entire tax has been paid on the income. There may be additional tax liability even after TDS. Say, a person earns interest of Rs 1,50,000 on bank fixed deposits. At 10 per cent, the bank deducts tax of Rs 15,000. This would have sufficed if the person was in the 10 per cent tax slab. But if the person is in the 20 per cent or 30 per cent tax slab, thanks to his other sources of income, he will have to pay the balance tax.

Anand.k@thehindu.co.in

(This article was published on August 11, 2012)
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