TDS on Bank Deposit and Interest

Interest income earned from bank deposits and other types of securities are taxable under the Income Tax Act. Hence, banks or financial institutions paying interest are required to deduct TDS at the rate of 10% of the interest earned. In this article, we look at the TDS provisions under the Income Tax Act which are applicable to bank deposits and interest income obtained from banks.

TDS on Bank Deposit

Most taxpayers are subject to TDS on bank deposit as interest on bank fixed deposit is fully taxable. In case interest income for a year is more than Rs.10,000, then Banks would deduct TDS at the rate of 10% of the interest earned. In case the account holder has not updated his/her PAN on the bank account, then TDS would be deducted at the rate of 20% of interest earned. Hence, it is important for all taxpayers to ensure that their bank account conforms to KYC norms.

Procedure for Exemption - TDS on Bank Deposit

Taxpayers who do not have taxable income of more than Rs.2,50,000 are also subject to TDS on Bank Deposit if the interest income earned is more than Rs.10,000 in a year. Such taxpayers who do not have taxable income can file Form 15G or Form 15H with the concerned bank to avoid deduction of TDS.

Form 15G

Form 15G is a declaration made by an individual or person claiming certain incomes without deduction of tax. The form reproduced below can be completed and submitted by a taxpayer with the Bank to avoid TDS deduction on bank interest.

Form 15H

Form 15H is a declaration made by an individual who is of the age of 60 years or more claiming certain incomes without deduction of tax. Form 15H can be submitted only by persons over the age of 60 years, while Form 15G does not have any age limit.

Claiming Refund of TDS on Bank Deposit

If the bank has deducted TDS on bank deposit from a taxpayer not required to pay tax, then the taxpayer must

file income tax returns to claim a refund of the tax deducted by the bank. As the process for filing an income tax return and claiming a refund is cumbersome, it is recommended that all taxpayers who are not required to pay taxes, file Form 15G or Form 15H to avoid TDS.

TDS Rate for Interest Payment

Any person responsible for paying income by way of interest on securities is required to deduct TDS at the rate of 10% if PAN is provided and 20% if PAN is not provided. On deducting TDS, the deductor is required to deposit the same with the Government as per the due dates mentioned below:

• Tax deducted during the months of April to February should be credited to the Government on or before seven days from the end of the month in which tax is deducted.
• Tax deducted during the month of April should be credited to the Government on before the 30th of April.

If a person fails to deduct tax at source or fails to deposit TDS deducted to the Government by the stipulated date, the assessee would be imposed with simple interest at a rate of 1% for every month or part of the month, starting with the due date until the date of deduction. 1% of interest is only meant for a deduction, whereas a rate of 1.5% would be applicable in case of non-payment.

Exemption from Certain Interest from TDS

The interest of securities payable is exempted from tax-deductions in the following cases:

• Interest payable to insurance companies in respect of any securities owned by them, or in which they have a complete beneficial interest.
• Interest paid or credited by a widely held company not exceeding Rs 5000, in relation to the below-mentioned scenarios:
  • If debentures are issued by a widely held company, whether or not such debentures are listed in a stock exchange in India.
  • Interest is paid/payable to an Individual or HUF who is a resident of India.
  • Interest is paid by account payee cheque.
  • The aggregate amount of interests paid/payable during the financial year does not exceed Rs 5000.

• Interest payable on any security issued by a company which is in a dematerialised form (dematerialisation is the conversion of physical shares into an electronic format), and is listed on a recognized stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 and the rules made thereunder.
• Interest paid or credited on Taxable 8% Saving Bonds 2003, issued by the Central Government, provided the interest of such bonds doesn't exceed Rs 10,000.
• A person, other than a company or firm furnishing a declaration in writing in duplicate, in Form No. 15G to the payer, stating that there is no Tax Payable on his Total Income.
• Any payment made to any person for, on or behalf of, the New Pension System Trust referred to in Section 10(44).
• Payments made to notified institutions, association or body, etc.
• Certain entities required to file Returns under Section 139(4A) or 139(4C).
• Entities whose income is unconditionally exempt under Section 10.

TDS on Deep Discount Bonds

Tax deduction at source under Section 193 or Section 195 (the former dealing with deduction of tax at source with respect to interest of specified securities; the latter with the deduction on non-resident payments) can be executed only at the time of redemption of such bonds, notwithstanding whether the bonds have been declared by the bond-holder annually on accrual basis, or declared only in the year of redemption. Any person, who has declared the income from a Deep Discount Bond on annual basis during the term of the bond, must make an application to the Assessing Officer under Section 197 of the Income-tax Act, requesting the Assessing Officer to issue a certificate stating no tax shall be deducted or deduction must be executed, but at a lower rate. Given a situation like this, the assessee should furnish details of the income deposited to tax, along with the prescribed Form no. 13, on an annual basis. If the assessee is not the original subscriber but has acquired the bonds from another person, he must file the relevant particulars including the name, address and PAN of the particular person. On satisfaction of these conditions, the Assessing Officer will issue a certificate allowing tax deduction at source at a reduced rate, to be calculated by the total income of applicant in the year of redemption.