TDS relief gives less benefit for higher taxpayers

Nobody likes taxes. Naturally, tax deducted at source or TDS has always been hated. The scorn against TDS is uniform, be it from salaried or businesspersons. This is because TDS gives an impression that it reduces your payment/income. Very few realise that tax paid earlier is better.

As per the Income Tax Act, any company or person making a payment is required to deduct TDS at prescribed rates if the payment exceeds certain threshold caps. It is also true that many pensioners and senior citizens are subject to hardships because their tightly run finances are messed up by TDS. Such people have to then file tax returns to claim refunds. So when finance minister Piyush Goyal announced changes to the rules on TDS in the interim Budget 2019, many heaved a big sigh of relief. But financial experts don't agree that TDS relief is a good thing for everybody. They told DNA Money that while the TDS rules will help some sections of depositors, others need to be watchful. Read on to know why.

Bank deposits

Goyal has proposed that the TDS threshold on interest earned on bank/post office deposits be raised from Rs 10,000 to Rs 40,000. The earlier Rs 10,000 limit meant that once you had deposits worth Rs 1.5 lakh at an interest rate of 6.75%, the cap would be breached. With the Rs 40,000 limit, there is now more room. Depositors/investors will be paid interest after deducting the applicable tax at source only when annual interest cross Rs 40,000.

The increase in the limit for TDS on bank interest will reduce hassles of senior citizens and persons with incomes below the taxable limit. Many of them usually distribute their deposits across various banks so as to avoid a part of their low income getting locked up in tax refunds cycle due to TDS.

"With the increase in the limit, an individual having up to Rs 6 lakh deposit at an assumed rate of 6.75% per annum will not be subject to TDS deduction," says Mrin Agarwal, financial educator, founder director of Finsafe.

But a relief on TDS does not mean there is a tax cut. Interest will still be taxed as per the depositor's tax slab. "People feel that this is tax saved. Actually, for someone who needs to pay tax, TDS is better. If you come under no tax slab, there is no problem. If you have taxable income above Rs 5 lakh, you will pay tax as per slab rate and interest income is treated as other income and fully taxed during tax filing. TDS deduction in most cases is 10%. So, if somebody is in 20 or 30% slab, less deduction means more tax payment at return filing stage," says Dinesh Kakkar, a banking and financial expert.

The proposed move also does away with 15G/H forms which were to be filed for non-deduction of TDS for many depositors. Now, those formalities need not be required if your income is up to Rs 40,000.

"Small depositors investing up to Rs 6 lakh who were submitting 15H/G will no longer have to submit these forms," adds Agarwal. Of course, even if the interest exceeds Rs 40,000, you still have the option of furnishing Form 15G or Form 15H, as the case may be, to avoid TDS.

The bank interest TDS move, combined with an income tax rebate, may bring more deposits of smaller investors to banks. Rama Patel, Director, CRISIL Ratings says, "Over the first nine months of this fiscal, banks have already raised deposit rates by an average of 40-60 basis points. We expect banks to sharpen the focus on deposit mobilisation over the medium term through attractive rate offerings across tenors in both bulk and retail segments. That, in turn, could further increase the cost of funds of banks, given that deposits account for the bulk of their funding."

Rent trench

Another TDS relief in interim Budget 2019 is one related to rent. The TDS threshold for deduction of tax on rent has been proposed to be increased from Rs 1.8 lakh to Rs 2.4 lakh for providing relief to small taxpayers.

"There is TDS on rent paid if the rental paid is around Rs 1,80,000 a year. Do remember it was not only for house property, but rentals on plant and machinery were also included. Now, if rental is up to Rs 2,40,000 a year there is no requirement for TDS thereon," said Deepinder Gupta, a tax consultant. This means the person who is paying the rent or the entity paying the rent does not need to withhold tax or deduct TDS.

Earlier, somebody paying a rent of Rs 1.8 lakh for 12 months, that is, Rs 15,000 had to withhold or deduct tax. Now, a monthly rent of Rs 20,000 will not be subject to TDS. However, do note that if you have taken a house on rent and are making a payment in excess of Rs 1,00,000 annually, there is no change in the requirement of obtaining the landlord's PAN. The PAN requirement is a must in many offices or you may lose out on the HRA exemption. Landlords without a PAN must be willing to give you a declaration. Tenants paying rent to Non-Resident Indian landlords should deduct TDS of 30% before making the payment towards rent, experts advised.

WHO GAINS FROM PROPOSED TDS CUT

• Senior citizens and depositors with incomes below the taxable limit will not have to file for tax refund
   
• Such depositors will not need to file Form 15G/H to avoid TDS
   
• Many depositors used distribute deposits across various banks so as to avoid their income getting locked up in tax refunds cycle