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Tax Deducted at Source (TDS) is a mechanism through which the government collects taxes from the income earned by individuals. TDS is applicable on certain types of saving schemes in India, including fixed deposits, recurring deposits, and some post office saving schemes. The threshold limit for TDS on saving schemes is Rs. 40,000 for bank deposits and Rs. 10,000 for post office saving schemes. If the interest income earned from these schemes exceeds the threshold limit, TDS is deducted at the applicable rate. TDS can be claimed as a tax credit while filing the income tax return.

Introduction

Saving schemes are popular investment options for individuals looking for a fixed-income stream and steady returns. However, investors need to be aware that tax laws require them to pay taxes on the interest earned from these schemes. Tax Deducted at Source (TDS) is a mechanism through which the government collects taxes from the income earned by individuals. In this article, we will discuss when an individual is liable to pay TDS on saving schemes and how to avoid it.

What is Tax Deducted at Source (TDS)?

Tax Deducted at Source (TDS) is a mechanism through which the government collects taxes from the income earned by individuals. TDS is deducted at the source of income and deposited with the government. The person or entity making the payment is responsible for deducting the tax at the applicable rate and depositing it with the government. TDS is applicable on various types of income, including salary, interest income, commission, rent, and professional fees, among others. The tax deducted at source is then credited to the taxpayer’s account and can be claimed as a tax credit while filing the income tax return.

Types of Saving Schemes on which TDS is applicable

TDS is applicable on certain types of saving schemes in India, including fixed deposits, recurring deposits, and some post office saving schemes. TDS is not applicable to all types of saving schemes. For example, TDS is not applicable on the Public Provident Fund (PPF), National Savings Certificate (NSC), and Sukanya Samriddhi Yojana (SSY), among others. However, if the interest earned from these schemes exceeds the threshold limit, the investor is required to declare the income and pay taxes on it while filing their income tax return. It is important to note that the threshold limit and the applicable rate of TDS may vary for different types of saving schemes.

Threshold Limit for TDS on Saving Schemes

The threshold limit for TDS on saving schemes varies for different types of schemes. For fixed deposits, recurring deposits, and time deposits, TDS is applicable if the interest earned exceeds Rs. 40,000 in a financial year. For senior citizens, the threshold limit for TDS on these schemes is Rs. 50,000 in a financial year. For post office saving schemes, including the Post Office Monthly Income Scheme (POMIS), the threshold limit for TDS is Rs. 50,000 for individual investors and Rs. 1,00,000 for joint investors in a financial year. It is important to note that the applicable rate of TDS may vary for different saving schemes and the investor’s income tax slab.

Applicable Rate of TDS on Saving Schemes

The applicable rate of TDS on saving schemes varies depending on the type of scheme and the investor’s income tax slab. For fixed deposits, recurring deposits, and time deposits, the applicable rate of TDS is 10% if the PAN is furnished; otherwise, it is 20%. For post office saving schemes, including the Post Office Monthly Income Scheme (POMIS), the applicable rate of TDS is 10% if the PAN is furnished; otherwise, it is 20%. For senior citizens, the applicable rate of TDS on these schemes is 7.5% if the PAN is furnished; otherwise, it is 15%. It is important to note that if the total income of the investor, including the interest income from saving schemes, falls below the taxable limit, the investor can submit Form 15G or 15H to the bank or post office to avoid TDS deduction.

How to avoid TDS on Saving Schemes?

To avoid TDS on saving schemes, you can consider the following options:

  1. Submit Form 15G or 15H: If your total income, including interest income from saving schemes, is below the taxable limit, you can submit Form 15G or 15H to the bank or post office. These forms declare that your income is below the taxable limit, and hence, no TDS should be deducted.
  2. Opt for cumulative deposits: In cumulative deposits, the interest is reinvested in the scheme, and the total interest is paid along with the principal at maturity. Hence, no interest is paid out during the tenure of the deposit, and hence, no TDS is deducted.
  3. Choose the right tenure: If you choose a shorter tenure for your fixed deposits, recurring deposits, or time deposits, the interest earned will be lower, and hence, you may not cross the threshold limit for TDS.
  4. Divide investments across banks or post offices: If you divide your investments across multiple banks or post offices, you can ensure that the interest earned from each scheme does not exceed the threshold limit for TDS.

It is important to note that you must consult a financial advisor or tax expert before making any investment decisions to ensure that your investments are aligned with your financial goals and tax obligations.

Claiming TDS as a Tax Credit

If TDS has been deducted on your interest income from saving schemes, you can claim it as a tax credit while filing your income tax return (ITR). The TDS certificate, which is issued by the bank or post office, will have the details of the tax deducted. You can use this certificate to claim the credit while filing your ITR.

To claim the tax credit, you must report the interest income from saving schemes and the TDS deducted in the relevant sections of your ITR. The TDS amount will be automatically credited to your tax account, and you can use it to offset your tax liability. If the TDS amount is higher than your tax liability, you can claim a refund for the excess amount.

It is important to note that if you do not report the interest income and TDS deducted in your ITR, you may receive a notice from the income tax department, and you may be penalized for tax evasion. Hence, it is advisable to report all your income and claim all the tax credits and deductions that you are eligible for while filing your ITR.

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Topics #savings