Banks, post offices to foot tax arrears on senior plan

Banks and post offices, which have not deducted tax at source on interest income paid on Senior Citizens Savings Scheme, will have to foot the tax along with interest, a finance ministry circular said earlier this month. Tax has to be deducted at source if the interest paid on the scheme exceeds Rs 5,000 in a financial year.

"...TDS would be applicable from the very first day the Senior Citizens Scheme was made operational, regardless of the fact that central government or Reserve Bank of India issued any notification/clarification at a later stage," the circular from the Central Board of Direct Taxes dated June 6 said.

While the senior citizens' plan was launched in August 2004, it was only in March this year that the tax board issued a clarification, stating that interest payments under Senior Citizens Savings Scheme were not exempt from TDS.

"In cases where the bank or the post office does not deduct tax, which was deductible, the bank/post office may be treated as an assessee in default for the amount not deducted and the same may be recovered from the bank/post office along with interest," the circular said.

In case a bank or post office has not charged TDS on interest income of over 5,000 rupees previously, it may have to deduct the same with retrospective effect.

The circular said while there would be no tax deduction at source on an interest income of up to Rs 5,000, the tax will have to be paid on the entire amount if it exceeds this level.

For instance, if the interest income is Rs 10,000 for the year, tax will have to be paid for the entire amount and not just Rs 5,000.

For the senior citizens' saving scheme, tax deducted at source is 10 per cent for the current financial year to March.

The scheme allows a maximum investment of Rs 1.5 million and pays an annual coupon of 9 per cent. It has a five-year tenure, which can be extended by 3 years. The scheme is open for citizens above 60 years or those citizens, who opted for voluntary retirement at 55 years and above.