Now, even your fixed deposit principal may be at risk
Moneylife Digital Team 01 April 2010

Fixed deposit holders should watch out. Banks may be snatching a part of the principal under the garb of deducting tax at source

Would you think twice before investing in a fixed deposit? The obvious answer would be a resounding ‘no’. But what if a bank is nibbling away at your principal in the name of deducting tax at source on your interest earnings?

It is unthinkable, right? Not quite. It appears that banks have found a way to tamper with the principal of your fixed deposits too. Here is the case of a senior colleague at Moneylife.

One fine day, she suddenly discovered that her fixed deposit of Rs50,000 in HDFC Bank was appearing in the statement as Rs49,934. Assuming it was a mistake, she wrote to the bank and was in for a shock.

She was told that while the bank has a policy of not recovering tax until the interest accrued crosses the taxable threshold of Rs10,000, in her case, this threshold was crossed when the interest on the FD of Rs1,028 was credited to her account. Her total interest was Rs10,607 which meant that the bank had to deduct tax at 10.2% on Rs10,607 which came to Rs1,081. The figure fell short after adjusting the entire interest of Rs1,028. So the bank coolly decided to dip into her principal, knowing fully well that it has no right to do so. Simply put, this means that the bank is eating into the savings and eating up the principal under the garb of collecting advance tax.

This was done despite the fact that she has a savings account with the bank. Neither was her savings account used to cover the amount nor was she asked to deposit the amount. The bank made no attempts whatsoever to inform her of their intentions to adjust her principal.

What is even more alarming is that this lady is a ‘privileged customer’ of HDFC Bank. If priority customers are at the receiving end of such shocking practices, one can only imagine the plight of ordinary customers.

Banks can only deduct tax on the interest amount and have no business deducting from the principal. When asked why the bank lopped off the principal, a bank executive gave this breezy reply: "There is an old CBDT (Central Board of Direct Taxes) clarification on this issue, but irrespective of the clarification, this (recovery from principal) is the option which has the least issues. Hence (the) Bank has, as a policy, decided on recovering from principal if the interest is not sufficient.” 

We have learnt to our utter horror that, indeed, under a CBDT circular, banks have been asked to deduct tax in advance per quarter on accrual basis. This is outrageous, considering that most of these deposits are fully tax-paid savings.
This issue has been raised before the Reserve Bank of India, which has sought comments from HDFC Bank.

Fixed deposits are the only investment avenue people don’t think twice about before investing. They are considered to be the safest form of investment that at least ensures that your tax-paid principal amount, usually your hard-earned savings or retirement kitty, is safe. That may no longer hold true.

Another senior citizen had a similar complaint about his cumulative FD. In his case, Bank of India deducted TDS amounting to Rs16,000 from the maturity value of his deposit. He was also not sent a TDS certificate. “First, they don’t inform people beforehand and start deducting TDS from day one. Most nationalised banks and even some private banks don’t send TDS certificate home.
For senior citizens, this is a big hassle. This is a huge lacuna which needs to be addressed,” he said. Commenting on this issue, Sheilu Sreenivasan, founder, Dignity Foundation said, “A fixed deposit is the most popular vehicle of investment among senior citizens. They trust FDs like no other instrument. This is absolute loot.”

VG Patel, trustee, Consumer Education and Research Centre (CERC) said, “No one should touch my deposit without prior intimation and authorisation. It is my savings and I put it in a bank for safe keeping. We take one step forward and two backwards in the process of freeing us from the clutches of ancient and arrogant rules, procedures and the civil servants.”

1 year ago
This happened to me in 2021 as well and it's HDFC bank itself on the other side. What are the options to get this money back from the bank?
3 years ago
If the bank collapsed and I don't get the full principal back from the bank, can I set of the unrecovered principal against other interest income for tax purposes?
Lenin DSouza
3 years ago
The above may be old news but it has happened to me today 24 Sept. 2019 at HDFC Bank. I have questioned them and they have sent my query to their back office. If they do not rectify their mistake what other route can I follow? Need advice
4 years ago
I understand this is an old article and I would like to know if this gotcha has been resolved! My father has asked me to put his savings into FD's and while doing some research, I came across this news and am little concerned
Please respond if this has been taken care and also if there are any new gotchas introduced into the FD system

Many thanks
1 decade ago
Your TDS dept should be sacked for deducting TDS even after submission of FORM 15 G. I want Mr. Kini to be shunted out. KIndly refund the amounts or else I lodge a police complaint. I will prove it is done with criminal intent
1 decade ago
Indeed banks are looting away hard earned white money of oridnary citizens. Whichs thus points to the fact as to why people prefer hoarding black money in India. The CBDT does not offer a fair deal to the common man.
Prabha Krishnan
1 decade ago
Dear Sucheta and team,
I had this experience in SBI personal Banking branch, Ventura Building, Hiranandani Gardens, Mumbai.
My FDs of Rs. 1 lac each matured on 31 March. I asked that the principal plus interest accrued be credited to my SB a/c in the same bank. For each FD only Rs 99998/- was credited. When I asked why, the staff claimed that the "system" would not allow the whole amount to be credited, even though I asked that TDS be deducted from the interest accrued. They also pretended to be surprised, though given the number of depositers, mine cannot have been the first case to have come to their notice.I have to travel by auto to this branch, which costs me Rs.32/ each trip. The branch across the road will charge me Rs. 10/ each time they update my pass book. I'm a senior, widowed, living on my savings. Surely the sacred "system" can treat me better?
Can Moneylife team help organise the thousands of such victims to challenge these banks? I agree with Praful Vora's comment that banks are hitting back at customers.
1 decade ago
At every stage, everyone tries to plunder n grab from poor. This is rampant thuggery by administration from Central Govt to Gram Panchayat.
Krishna Gopal Gupta
1 decade ago
I had experienced recently that the amount of FD paid to me on maturity and TDS amount deducted on it does not match with the maturity amount of FD. On asking, I was told that the interest earnest on TDS paid to Govt. will not accrue to you and thereby it has been deducted. The answer didn't satisfy me at all.
Avinash Murkute
1 decade ago
Thank you for informative article. Indeed it is loot and I have long back written about e-dacoits of India named HDFC bank. One thing I would like to bring forth - whatever law they apply, whatever circular they rely on, if they fail to issue TDS certificate, complaint shall lie with Commissioner of Income Tax for refusing to issue TDS certificate. And lack of intimation can be deemed as refusal to issue TDS. Time to find out how per day fine needs to levied on such defaulters like HDFC bank.
Hari Lakhera
1 decade ago
1 decade ago

1 decade ago
do look this thru and let me know what you think
tejas shah
1 decade ago
Banks and the staff are at times the most idiotic ppl we have ever met. Fortunately since this lady was a TEAM MEMBER so her story has come here. there are hundreds of stories daily in bombay like this... how does one get them to u ???
1 decade ago
exactly the same incident happened in my case from HDFC bank and they did not try to deduct the same amount from savings account neither did they inform me inspite of being a classic customer for many years. what is the method to address such issues? Few years back the same bank had sent me a statement which showed the first page of my a/c and other 4-5 pages of a/c statement of a company from Hyderabad. i naturally assumed that my remaining pages were sent to somebody else which i think is a gross violation of privacy.
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