After retirement in November 2004, state government employee Suprakash Chatterjee put all his retirement benefits in the Senior Citizens Savings Scheme (SCSS) at his local post office. The scheme offered the highest assured interest rate at 9 per cent (payable quarterly) at that time. In contrast, banks offered between 5 per cent and 6 per cent annual interest on their term deposits.
Chatterjee was happy knowing that like other post office schemes, such as MIS, NSC and post office term deposits, the interest income in SCSS won?t be taxed at source.
But these days he is scratching his head to make some sense of a recent government notification that makes interest payment on SCSS subject to tax deduction at source. Moreover, tax will be deducted on a retrospective basis in case it hasn?t been deducted so far.
Though no I-T benefit was allowed on interest earned on SCSS since its launch in 2004, many banks and post offices had not deducted the tax.
What does it say?
A finance ministry notification on June 6 says: ?TDS is to be made if the interest paid or payable exceeds Rs 5,000 during the financial year.? And tax is to be levied on the entire interest amount payable if it exceeds Rs 5,000. This means there will be no TDS if the total interest amount (from an SCSS account) is, say Rs 4,000. But if it is, say Rs 25,000, the tax will be levied on Rs 25,000 and not on Rs 20,000. The tax will be deducted at the rate of 10.2 per cent.
SCSS account holders who are not liable to pay income tax, however, can give a declaration for non-deduction of the TDS either in Form 15H (for persons above 65 years of age) or Form 15G (for persons between 55 years and 65 years).
But if your total annual income, including the interest income from SCSS account, exceeds the threshold limit ? Rs 1,85,000 for persons above 65 years of age and Rs 1,00,000 for those below 65 ? and show a ?zero? tax liability in I-T returns by investing in instruments permitted under section 80C of the I-T act, you can claim the refund of the TDS from your account.
Question mark
What confuses Chatterjee more is that a senior citizen would need to invest Rs 19,87,470 in SCSS to earn an annual interest of Rs 1,85,000 ? the threshold income slab for senior citizens to pay income tax. ?But one can invest a maximum of Rs 15 lakh in SCSS. This would give an annual interest income of Rs 1,39,625,? he said. Right now, there are a few savings options that give assured return but fall outside the TDS ambit. These are MIS, NSC and post office term deposits.
Favourites fall
Among all the investment options, senior citizens fancied the Post Office Monthly Income Scheme (POMIS) the most because it gave an annual interest rate of 8 per cent (payable monthly) plus a 10 per cent bonus on maturity. But since February 13 this year, the bonus has been withdrawn and this brought the scheme on a par with bank fixed deposits of same maturity (that is six years). The only difference is that while interest income above Rs 5,000 on bank fixed deposits is subject to TDS, it is not in the case of POMIS. The onus of paying tax on the interest income in POMIS is on the investor.
Bank on it
Bank fixed deposits over five years were made more lucrative in Budget 2006-07. Investments up to Rs 1 lakh in bank fixed deposits for five years or more is now exempt from income tax. This benefit is not available in POMIS or post office term deposits.
Savings certificates
NSC qualifies for section 80C benefit and there is no TDS on the accumulated interest. Banks are also coming out with fixed deposit schemes for six years and above offering a higher rate. Bank of India has introduced Satabdi Deposit Scheme, which offers an 8 per cent annual interest. Senior citizens will get a 9 per cent interest (maturity 8-10-year). SBI had also launched the Super Saver Scheme (maturity between 6 and 10 years), which offers a 7.5 per cent interest rate. Senior citizens get an 8 per cent interest.
Term deposits
Post office term deposits for five years also give an annual interest rate of 7.5 per cent, but it doesn?t give senior citizens a higher interest rate. Unlike bank deposits, these are not qualified for income tax benefit under section 80C.
Thus, the most lucrative savings options for senior citizens, namely SCSS and bank fixed deposits, come with the TDS sting now. One wonders whether this is a prelude to the ensuing EET (exempt exempt tax) regime!
