TDS on recurring deposits from June 1 force investors to close down deposits prematurely

NEW DELHI: Days after the Budget announced that tax deducted at source (TDS) will also apply to recurring deposits, banks are witnessing a rush of investors closing down their deposits prematurely.

Though it is fully taxable, the interest from recurring deposits is exempt from TDS. This only applies to interest from fixed deposits if the income exceeds Rs 10,000 in a year. The new rule is proposed to come into force from June 1, so investors are rushing to close their recurring deposits before the taxman gets whiff of their wealth.

"Premature closure of my recurring deposit will fetch me a lower interest rate. But at least there won't be a tax deduction," said an investor at a public sector bank branch in Delhi. Banks may see more premature closures of deposits as more investors become aware of the new rule.

It is not difficult to see why investors are panicky. Since the TDS is credited to the permanent account number of the investor, not mentioning the income in the tax return can lead to problems. The computer-aided scrutiny system of the tax department could pick up the mismatch in the tax credit and income declared by the assessee, which can lead to a detailed scrutiny by the tax authorities. If tax has been deducted at source but returns have not been filed, the tax department may want to know why.

"The new rules on TDS will help nail tax evasion and improve tax collections," declares Sudhir Kaushik, co-founder and CFO, Taxspanner.

TDS rules for fixed deposits are also being changed. Till now, this deduction kicked in only if the income from fixed deposits made in a particular bank branch exceeded the threshold of Rs 10,000 in a financial year. It was common for investors to open fixed deposits at multiple branches of their bank to avoid TDS. The budget has proposed that TDS should be levied if the combined interest income from FDs in all branches of a bank exceeds Rs 10,000 in a year.

The third major change is that co-operative bank deposits will also be subject to TDS. This was more or less expected.