Budget 2015: Interest income on recurring deposits to attract TDS

NEW DELHI: Finance Minister Arun Jaitley's Budget 2015 proposes to introduce Tax Deducted at Source (TDS) for recurring deposits (RD). Amendments made to Section 194A will mean that interest income above Rs 10,000 for an RD, will attract TDS.

"However, for interest income up to Rs 10,000 there will be no TDS. Apart from this, in case an individual has multiple RDs with a single bank, the cumulative interest income, will attract TDS, if it exceeds Rs 10,000," explains Sailesh Multani, Chief Financial Planner at Edelweiss.

"Yet another provision in the Budget will ensure that in case an individual has multiple Fixed Deposits (FDs) with a single bank, the cumulative interest income, will attract TDS, if it exceeds Rs 10,000m," adds Multani. The new provisions will be effective from June 1, 2015.

"Currently, the definition of "time deposits" provided in section 194A of the Income tax Act, 1961 excludes recurring deposits. Therefore, payment of interest on recurring deposits by banking company or co-operative bank is currently not subject to TDS. However, in the current Budget, the FM has proposed to amend the definition of 'time deposits' so as to include 'Recurring Deposits' within the ambit of TDS for deduction of tax U/S 194A of the Act. Hence, interest earned on recurring deposits exceeding Rs 10,000 will be subject to tax deduction at source at the applicable rates," explains Amarpal Chadha, Tax Partner at EY India.

According to Multani, this move will not make RDs and FDs less lucrative for the investor. "This is a step in the right direction from the government. Earlier, people used to open multiple FDs to evade TDS. Now with both cumulative interest income on FDs with a single bank and RDs attracting TDS, a loophole has been plugged in," Multani told Economictimes.com.

"There is no case for people to shift away from RDs and FDs, because the income would be taxable irrespective, when the tax returns are filed," Multani added.

Will this move make RDs less lucrative for the common man? No, says Chadha. "The taxability of interest on recurring deposits has not changed. However, the Budget 2015 has proposed that in case the earnings in a year from recurring deposits are more than Rs 10,000 then the interest will be subject to tax deduction at source and the net interest amount would be paid to the tax payer at the time of pay-out. Though there is no change in the taxability, the manner in which tax is deducted/ paid will change."

"In the case of individuals where the total income is below the exemption limit, they can submit certain forms to banks to get NIL deduction of tax on recurring deposits," Chadha explains.

So what alternate investment options can one look at? "The investment options would depend on the individuals' risk appetite and the objective of investment. Generally, Public provident fund, New pension scheme( additional deduction of Rs 50,000 has been proposed in the Budget) could be some of the options," suggests Chadha.