TDS for senior citizens

Clarification confuses investors, can harass the elderly.

MUMBAI: The Ministry of Finance, Department of Economic Affairs (Budget Division) has issued a circular No. 28 /2004-NS-II dated 28.3.06 clarifying the applicability of tax deducted on source (TDS) on interest from Senior Citizen Saving Savings Scheme, 2004 (SCSS).

TDS implies that the interest that you earn from your SCSS investment will be taxed and such tax will be deducted by the bank itself and only the net interest (after tax) will be credited to your account.

The Income Tax Act offers a way out.

Investors can request the bank concerned not to deduct such tax at source (if their total income is below the taxable limit) by submitting such request through Form 15H.

It has further been clarified that the facility of furnishing Form No 15H is available only to an investor resident in India and who is of the age of 65 years or more at any time during the previous year.

This is because under Income-tax Act, a person who has attained 65 years or more at any time during the previous year only is treated as a senior citizen. This is a classic example of the weird ways of drafting important clarifications, which, sadly confuse more than clarify. The notification has baffled not only the investors but also the authorities in the postal department and the banks handling SCSS.

The story doesn't end here. As a sequel to this, the Ministry of Communication & IT, Department of Posts (F.S. Division) has issued a circular dated 30.3.06, reproduced below:

"The undersigned has been directed to communicate further that while circulating the above clarification to all post offices the postmaster should be directed that in case of non-deduction of income tax at source in the past, they should address the senior citizen savings scheme investors to pay tax as due for interest paid earlier."

This means TDS is applicable with retrospective effect!

SCSS was originally introduced on 2.8.04. Therefore, a plain reading of the above circular implies that the bank or the post office with which you have your SCSS account may well demand TDS on the interests paid to the investor from such time he or she has opened the account i.e from 2.8.04 onwards.

Now, the problems:
1. If it was applicable right from the date of launch of SCSS on 2.8.04, why was the TDS not applied for FY 04-05 and FY 05-06 so far? Was the ministry of finance not aware of the fact that the TDS was not applied by accounts offices because of executive instructions not to do so? Was CBDT sleeping on this issue for as many as two financial years?

2. What is the rate of TDS? This aspect has not been dealt with either by CBDT, or by Department of Economic Affairs which has received the instructions from CBDT or by the Department of Posts. The instructions have merely been issued without dealing on this important aspect and without finding out the answer from CBDT.

3. What is the minimum threshold beyond which TDS is applicable? For instance in the case of bank deposits, the threshold is Rs. 5,000 below which the interest earned does not suffer any TDS. What about SCSS?

4. What about those investors who are not senior citizens? The senior citizen (those who are allowed to invest in the SCSS) as defined by SCSS is different from the one as defined by the Income Tax Act.

Accordingly, an individual (and not HUF) who has attained the age of 60 years or above on the date of opening the account is eligible to pen an SCSS account. For someone who has retired under VRS or otherwise, the age limit is even lower at 55 years, provided the account is opened within one month of the date of receipt of the retirement benefits. The retired personnel of defence services (excluding civilian defence employees) are eligible irrespective of the age limit.

According to the words of the circular, all the above mentioned persons will have no recourse of Form 15H and will instead have to suffer the TDS silently.

Shouldn't the other investors in SCSS (especially the retirees) not be entitled to similar facility? Is this really the intention of the legislation?

5. There is another practical difficulty. For FY 04-05 and 05-06, say an investor's total income including interest from SCSS is below the tax threshold of Rs. 1,85,000. Due to this, neither were any taxes due from him nor would he have filed his tax returns. Now in the current year, if a demand for the tax by way of TDS (for the past years) is made, how will such a person claim any refund?

6. Finally, the LIC's scheme, ‘Varishtha Bima Yojana' which stands discontinued did have the blessings from the same CBDT in the form of exemption of TDS. Are the authorities going to levy TDS on the same in near future?

Last but not the least, we cannot lose sight of the fact that SCSS is an investment vehicle essentially meant for senior citizens to tide them through this phase of their life. The government didn't offer any tax benefit on the interest and SCSS interest was always fully taxable. Whether the interest ought to have been tax-free or not is a discussion for another day. However, now that it is fully taxable, why not leave it to the investors to take care of their tax obligation?

If liable they would file their tax return, if not, they won't. Imposing TDS retrospectively, and then allowing some select investors to submit Form 15G complicates matters.

The writer is director of A N Shanbhag NR Group, a Mumbai-based tax and investment advisory firm. He may be contacted at sandeep.shanbhag@gmail.com