Bank deposits are suffering in the wake of Budget 2015-16

Bank deposits are suffering in the wake of Budget 2015

After Budget 2015 was announced there were a lot of people who were heaving a sigh of relief because the budget had promised some interesting reforms which were all set to help the country’s economy grow at a satisfying pace. 

There is however, one segment of investors who are not so happy with some of the changes and are scrambling to close investments. 

The government had realised that as it got smart and imposed taxes, investors got smarter and found innovative ways to mask their income so that they didn’t have to pay taxes. With the new budget coming in, the primary aim is to ensure that there is proper growth but there is another agenda that the change in rules are addressing and that is of tax evasion. 

To start with the rules regarding TDS have been altered to ensure that investors are paying their taxes properly. So which deposits have been affected by these new rules and what are the provisions under the new rules?

Recurring deposits...!

In the case of recurring deposits, the interest earned on them was always taxable however, paying the tax was up to the investor and in some cases it would not be paid or even declared. Under the new rules, if the income on an RD exceeds Rs. 10,000 in a year then the bank holding the deposit will deduct tax at source. 

This new rule has seen people scrambling to close their RD’s prematurely because if they don’t then, come June 1st 2015, the bank will deduct TDS on it.

Fixed deposits..!

Another deposit that is experiencing heat from the new TDS rules is the fixed deposit. Income from fixed deposits was taxable and the banks had been deducting tax at source but to avoid being taxed depositors would circumvent these deductions by breaking the amount, which they wanted to put in an FD, into smaller portions and opening FD’s across various branches of the same bank. How this helped was since tax was being calculated based on individual deposits, they would escape heavy taxation. 

They would, in fact, either avoid having to pay a tax on the income or they would pay less tax because the amount in the FD would be smaller and so would the earnings. To counter this practice the new rules say that the tax will now be calculated based on the value of the interest earned by all the FD’s held by the person irrespective of the branch it is held at. That is to say that the tax applicable will be on the net value of the earnings from all fixed deposits held at various branches of the bank.

Co-operative bank deposits

The third deposit to feel the heat are co-operative bank deposits. The attraction for people to open deposits in co-operative banks was the fact they tend to offer interest rates that are more attractive. 

There was also an initial issue with the tax liable for the income earned on these deposits which was taken care of the governments instruction to deduct 10% TDS in 2013-14. But you should know that the 10% is just an interim figure and the actual tax payable will depend on the amount earned by the deposit.

How to avoid tax problems with deposits

Well the best advice would be that you should pay your taxes. Not only must you pay your taxes, you must also make it a point to declare the income because if you don’t, the bank will still deduct the tax but your declarations won’t mention the income. 

This inconsistency could raise flags for the IT department and could end with you paying fines for not declaring the income. The only way you can avoid taxes is if you are actually not liable to pay taxes, in which case, you should ensure that you provide the bank with forms 15G and 15H when you open the deposit.

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