The banks are under the statutory obligation to deduct tax at source from depositors account if the total interest paid/ payable in all term deposits held by a person (i.e. held under the name of same identity) exceeds the amount specified under the Income Tax Act. After the end of the financial year, each bank in which you have an account and a tax has been deducted there, will issue a tax deduction certificate (TDS certificate) mentioning the amount of tax deducted.
When tax is deducted at source by bank?
1) Bank does not deduct tax at source for savings bank account. Moreover, interest up to Rs. 10,000 earned on the deposits in a savings bank account is exempt from tax. However, if the interest income exceeds the above mentioned stipulated amount then the same need to be reported in income tax return and included in the total income of the assessee. In other words, interest earned above Rs. 10,000 is taxable.
2) Bank do not TDS, if the total interest earned from term deposits (includes fixed deposits and recurring deposits) held by a person in a financial year is up to Rs. 10,000. However, this interest income forms part of total income and accordingly tax has to be paid on it.
3) If the total income from term deposits held with a bank exceeds Rs. 10,000 in a financial year, then it becomes responsibility of the bank to deduct TDS.
Rate at which TDS is deducted
In case of individuals where PAN is not registered with the concerned bank, tax is deducted at the rate mentioned in the relevant provisions of the Income Tax Act or at the rate in force or at the rate of 20%, whichever is higher. Once a tax has been deducted by your bank, then there is no other way to get that money except claiming a refund from income tax department, if you are eligible for it.
How to avoid tax deduction by bank
There are certain conditions when such deduction of tax at source can be avoided by the depositor. The depositor, if entitled to exemption from TDS can submit declaration to his/ her bank in the prescribed format at the beginning of every financial year. The declaration filed in form 15G or 15H u/s 197A shall not be valid unless the person filing the declaration furnishes his or her PAN in such declaration. In addition, take a note of it that these forms are valid for one financial year only. So, if you calculate your total interest income from all the banks and all the deposits will not fall in the boundaries of taxable income, then it is better to submit the relevant form to your bank in the beginning of the financial year.
If you don’t wish your bank to deduct TDS then it is better not to put all your eggs in one basket, i.e. spread your deposits in different banks.
Who can submit these forms?
The one who believes that despite adding the total interest income his/ her total income will not fall in the taxable bracket should fill up the form and submit it to the bank. A person should be resident of India, then only he/ she will be eligible to submit the form. These forms are available free of cost at all the branches of the bank. For each bank, a fresh form is required to be submitted covering the details of all the deposits held in all the branches of the bank. There are different rules for applicability of individuals for submitting these forms. 15G is for those persons who are below 60 years of age. A person who is above this age or completes 60 years in the financial year can submit form 15H.