Understanding TDS issues

Pensioners have a responsibility to know their tax liabilities
"Some of them call pension simply a ‘compensation’ which they feel could have either been kept out of the tax net or at least not subjected to tax deduction at source."
"Some of them call pension simply a ‘compensation’ which they feel could have either been kept out of the tax net or at least not subjected to tax deduction at source." Special arrangement

We are already in a quarter of taxing moments as this is the time when many of us meticulously focus on negotiating income tax liabilities. Even as we are familiar with tax related matters, the process of tax calculation and tax deduction at source (TDS) has been most confusing for many of us. However, these taxing moments are equally confusing for retired government officials receiving monthly pension, as they too fall in the tax net.

Some time back, I came across a Facebook post suggesting to keep pensioners outside the ambit of income tax net. In the past too I have been regularly receiving emails from some state pensioners expressing their ‘confusion’ about the amount of income tax being deducted from their monthly pension. They were criticizing the government as well as their bank branches for ‘forcibly’ making them pay income tax. Some of them call pension simply a ‘compensation’ which they feel could have either been kept out of the tax net or at least not subjected to tax deduction at source.

Why and when is income tax applicable? How to negotiate and reduce it? How to get a refund of the tax when deducted at source? These are some of the questions which I found currently striking pensioners’ minds. I tried to find an appropriate response to these queries from my acquaintances having background and dealing in tax matters.

Under the Pension Act, pension is of course compensation, a periodical allowance or you can say a stipend granted on account of past service. However, it’s envisaged in income tax rules that pension is included in salaries and the provisions of tax deduction at source (TDS) are applicable in the same manner as these apply to the salary income of regular employees.

It’s noteworthy that the Central Board of Direct Taxes (CBDT) has clarified that in the case of pensioners receiving pension through banks, provisions of TDS are applicable in the same manner as they apply to the salary income. However, the rules state that pension received by an individual, who has been in service and has been awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or other gallantry award is exempted from deduction of tax at source on pension in terms of section 10 (18) (i) of the Income Tax Act, 1961.

What is the tax liability of a pensioner?

To know your tax liability, you have to first understand that income from your pension (considered as salary under income tax rules), financial instruments and business transactions like sale of property, interest income from banks, commissions and incentives, payment received for contracts and services, vendors, dividends and awards or prizes earned as money, will be counted for calculation of the income tax. Once you find your annual earnings crossing the threshold limit of exemption, you are in the tax net and tax deduction at source will come into force.

Tax deduction at source (TDS) is the spot deduction of tax from the income source itself at the time of earning. The rate for tax deduction is not uniform. Notably, the banks are responsible for complying with tax deductions at source provisions in case of pensioners, as they disburse the pension amount. Whosoever is found to have earnings beyond the threshold limit for paying income tax, the bank has to deduct the same from their pension accounts.

What should pensioners do once they are in the tax net?

Here the responsibility lies on the shoulders of pensioners and if they find themselves in tax net they should submit all the relevant investment details, if any, for seeking rebates and exemptions along with the supporting documents. Even if the bank has deducted any tax amount from a pensioner’s account, he/she can seek a refund by presenting relevant tax rebate documents to the bank.

There are exemptions or tax deductions towards the pension income section 88. Here the tax rebate can be claimed under this section. Premium paid towards the insurance policies, PPF, infrastructure bonds, repayment of the home loans, investments made in the mutual fund pension plans, investments that have been made in the savings linked to equities, and tuition fees, among others, are exempt from taxation, up to a certain limit. It is advisable for a pensioner to consult a tax advisor to come out of tax woes.

Lastly, one can seek qualification for income tax rebates within the provisions of income tax rules, but cannot avoid paying it once under tax net.

Can a bank make a deduction from the principal amount of a Cash certificate? Isn’t it mandatory for the bank to inform customers of deductions to be made from the Principal amount of the Cash Certificate deposited with the Bank? This is what a senior citizen has asked.

Fact of the matter is that term deposits in the shape of Fixed deposits (FD) and Cash Certificates are very popular among the general public and senior citizens, mostly the retired persons take route of these financial instruments to earn a fixed amount through interest income. Notably, these bank financial instruments are considered a safe investment arena even during volatile market circumstances.

But the above questions posed by the senior citizen are very much concerning as these relate to the rules governing TDS. It’s obvious that once a depositor finds that the bank has reduced the principal amount of his/her fixed deposits, panic is inevitable.

First, let’s understand that deducting TDS from the principal amount explains a situation where the bank officials had not deducted enough tax in the past on the interest income of the depositors fixed deposit.

If the bank has failed to deduct tax on time, it is not the fault of the customer. It is a lapse on the part of the bank. The bank is duty bound to contact the customer and apprise him/her about the shortfall in previous tax deduction. They have to seek consent of the customer before making any deductions in his other accounts and deduction from the principal amount of the FD is out of question. This is simply a breach of trust.

What exactly are the rules governing TDS?

Banking experts clearly state that Tax Deducted at Source (TDS) can be deducted only from interest income and not from the principal amount. As per Central Board of Direct Taxes (CBDT) norms, banks have to deduct tax in advance per quarter on an accrual basis. This means banks typically calculate the total interest earned in a year, even in case of cumulative term deposits where the interest is not paid out but rolled back into the fixed deposit.Basically, the tax is deducted on the income earned and in case of FD, any TDS can be recovered from the interest income only. Notably, TDS is to be recovered and remitted in the year of accrual and not on maturity.

Pertinently, if the bank deducts the TDS at one shot at the end of the year instead of every quarter, then they have to inform the customer accordingly.

How can an aggrieved customer resolve TDS issue?

There is a good section of customers who are victims of wrong TDS and fail to report it to the bank or any concerned authority.

The affected customers can, in the first instance, approach the bank and apprise them about the matter. If they fail to resolve the issue at the bank, explore lodging complaints with higher authorities. If they still go unheard, they should approach the Banking Ombudsman where the complaint as per extant guidelines would be resolved in a given time frame.

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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