Due Diligence. TDS on recurring deposits too

The Budget has brought in a few changes with respect to deduction of tax on the interest earned on deposits.

For one, interest on your recurring deposits will now be subjected to TDS (tax deductible at source). Until now, only fixed deposits fell under the TDS ambit.

Two, the Budget has also tweaked the method by which the threshold limit of interest earned will be reckoned to calculate the TDS.

These changes will not impact your final tax outgo as the interest you earn on both recurring and fixed deposits are anyway fully taxable.

However, because of the higher TDS, you may end up with lower cash flow than before. Currently, tax is deducted on the interest you earn on your fixed deposits when interest income exceeds ₹10,000 in a year.

But this had hitherto not included recurring deposits. Now that the Budget has made recurring deposits also liable to TDS, the interest you earn in excess of ₹10,000 in a year will be subjected to a 10 per cent tax.

This will impact the compounding of interest.

For simplicity’s sake, say you earn ₹20,000 as interest from your recurring deposit at the end of the first year.

At the rate of 10 per cent, your TDS will be ₹2,000, which will be deducted from your interest.

Hence, the following year, the net interest that will be added to your principal to calculate the compounded interest for that year will be ₹18,000, and not ₹20,000 as was the case earlier.

There is also a change in the way the ₹10,000 limit on interest earned will be calculated for deciding whether TDS is applicable or not. Earlier, if the interest earned on fixed deposits exceeded ₹10,000 at a particular bank branch where you held your account, then tax was deducted at source. The Budget has tweaked this rule and all deposits under all branches of a particular bank will be clubbed for calculating the threshold limit of ₹10,000.

Thus, if you have been splitting your deposits across different branches to avoid TDS, you may as well consolidate all your deposits in one branch now. It will at least be easier to manage.

Despite these changes, do note that the new rules do not impact your total tax outgo in any way.

Also remember that if total interest income from all your bank accounts exceeds ₹10,000, even if TDS has not been applied, you will still have to club the interest with your taxable income and pay taxes at your slab rate.

On the other hand, even if TDS has been deducted, you may actually have to cough up additional tax if you fall in the higher tax bracket of 20-30 per cent.

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