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Perhaps the most favoured savings instrument of Indian investors is the 8% RBI Savings Bond. Safe to the hilt, it has retained its popularity in spite of the sharp appreciation in interest rates in recent times.

So far, the interest on the bonds, though taxable, was not subject to tax deduction at source (TDS). However, this was too good to last and with effect from June 1, 2007, any interest exceeding Rs 10,000 has become subject to TDS, as per notification No. F.4 (10) - W & M/2003 of the ministry of finance.

Albeit, there is a problem with the notification — while specifying that TDS will be applicable, it doesn’t specify the rate thereof. And as is wont, in the absence of clear cut instructions, there is confusion galore. The first half-yearly interest, which was hit by TDS, fell due in August, and some investors found that TDS @10% has been deducted, whereas others have suffered a 20% deduction.

So, what is the correct rate? For ascertaining this, one has to refer to Sec. 193 of the Income Tax Act read with Part II of the First Schedule to the Finance Act 2007. Sec. 193 specifies the securities on which TDS will be applicable and the Schedule specifies the exact rate thereof.

Hitherto, since interest on all government securities (including RBI Bonds) was free of TDS, the Schedule never contained any deduction rate as such for such instruments. Now, while the bonds have been subjected to TDS and a consequential amendment has been carried out in Sec. 193, the Schedule has remained untouched.

Therefore, one has no option but to adopt the 20% rate specified under the residuary clause for other income. If the government indeed intends the applicable rate to be 10%, a notification clearly spelling out as much would be required to clear the confusion.

That said, let’s figure out the ways an investor can escape this TDS. The escape depends upon one’s income level and age. Investors may furnish Form 15G or 15H, requesting the payer of income not to deduct any tax. These forms have to be filed in duplicate and once the bank takes them on record, the entire interest is paid to the investor without any tax deduction.

There are certain conditions for filing each form that a taxpayer needs to understand and ascertain whether he or she is eligible for filing the relevant form. Filing the form without being eligible to do so is illegal and will invite payment of interest on the tax payable and also a penalty.

The main difference between Forms 15G and 15H is that Form 15G is meant for non-senior citizens, whereas Form 15H is meant exclusively for senior citizens (people 65 years and above).

In order to be eligible to furnish Form 15G, the non-senior citizen investor needs to fulfill the following two conditions:

The final tax on his estimated total income computed as per the provisions of the Income Tax Act should be nil, and

The aggregate of the interest etc. received during the financial year should not exceed the basic exemption slab, which is Rs 1.10 lakh for males and Rs 1.45 lakh for ladies.

If both these conditions are satisfied, Form 15G may be furnished and the entire interest income is received without tax deduction.

On the other hand, Form 15H imposes just the first condition, in that, the final tax on the investor’s estimated total income should be nil. The second condition imposed by Form 15G is not applicable. To take an example, say Mr Shah, 66, has a total income of Rs 2,55,000, of which Rs. 1,45,000 is earned from RBI Bonds and the rest from bank deposits. He invests Rs 60,000 in PPF. Now, is he eligible to furnish Form 15H?

As pointed out earlier, all Mr Shah has to do is to ascertain his final tax liability. It doesn’t matter what amount he receives from which source — this information is irrelevant for Form 15H.

We find that Mr Shah’s net income works out to Rs 1,95,000 (Rs 2,55,000 less Rs 60,000). As the basic exemption limit for Mr. Shah is Rs 1,95,000 (on account of him being a senior citizen), his net tax liability is nil and hence he is indeed eligible to file Form 15H, thereby escaping TDS entirely.

However, note that if Mr Shah were to be below 65 years of age, he wouldn’t have been able to file Form 15H since his interest income is above Rs 1.10 lakh, which does not satisfy the second condition.

To Sum

Two additional points need to be kept in mind. Fresh forms are required to be filed each year. As incomes of investors may differ from year to year, the eligibility for furnishing the forms has to be ascertained every year.

Secondly, for optimum benefit, these forms need to be furnished at the beginning of the fiscal such that the entire amount of interest escapes TDS. If the form is filed during the year, the tax already deducted cannot be adjusted against future deductions.

sandeep.shanbhag@gmail.com