Small FDs now under IT scanner

It is not just the Banking Cash Withdrawal Tax (BCWT) but the proposed Section 206A in the Income Tax Act that has the high-networth taxpayers and the tax planners worried.

Beginning next month the ploy of splitting fixed deposits and recurring deposits into small amounts to escape the taxman's radar will no longer work.

The proposed Section 206A in the Budget seems to have been lost in the din created by the BCWT. Under the new section every bank, cooperative society or public company will be required to file quarterly details of all the accounts where the income earned in the account is less than Rs 5,000.

This will mean that even if someone earns Re 1 interest in a quarter, the tax authorities will get the details. The amendment comes into effect from beginning of June 2005 and requires a soft copy of the details to be filed for quarters ending June, September, December and March.

"Now, not only would tax authorities ask the taxpayers why they have been avoiding tax by splitting deposits but also ask the source of all these deposits. In case the taxpayer is not able to come up with answers, he may be in trouble," a tax expert said.

Some tax experts have termed the move as draconian as even if a few rupees are credited in a savings account the details will be under the lens of the tax department.

The experts are also of the view that there is nothing that any depositor can crib about as the return is to be filed by the banks and not by the depositors.

They have, however, suggested that the government should fix a reasonable threshold as it does not make sense to collect data from those accounts where a very small amount of interest is being credited.

Senior finance ministry official told Business Standard that they would look into the need for a minimum threshold to avoid taking unnecessary data for analysis.

According to tax experts people have been splitting bank deposits into smaller units with the hope that small amounts of deposits will not come under scrutiny.

People also split deposits to avoid tax deducted at source (TDS) as the existing Section 194A does not require TDS to be applied for deposits with banks, cooperatives and public companies where the interest in a financial year does not exceed Rs 5,000.

Further, the Rs 5,000 threshold is computed with reference to the income credited by each branch separately giving scope to people to split deposits using different branches.

According to tax experts, people not only split their deposits between different branches but also different banks and also use names of different members of the family to split deposits.

In case the banks, co-operatives and public companies do not comply with the requirement of filing the returns within the specified time they would incur a penalty of Rs 100 for every day of the default.

Fixed onus

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• Under the new section every bank will have to file quarterly details of all the accounts with less than Rs 5,000 earning
• The method of splitting fixed deposits into small amounts to escape the taxman's radar will no longer work
• Tax experts say the government should fix a reasonable threshold as there is no sense in collecting data from accounts with a very small amount of interest