TDS is not only tedious, it is sheer harassment. Government must make interest from banks free from income-tax

As it is the returns earned on bank deposits is not keeping pace with inflation. Besides, people face innumerable difficulties in getting the correct tax certificates to file tax returns

As you walk to the income-tax office in Bengaluru, you will pass by a big hoarding outside that reads, "TDS is not tedious, it is the easiest". And the message at the bottom reads: "Bharo tax mauj hai max".

But the reality is totally different. Tax deducted at source (TDS) is one of the most obnoxious provisions in the Indian income-tax system, which causes unbearable harassment to the common man, who even after paying the tax cannot sleep in peace. As it is, the high rate of inflation, rising oil and gas prices, and the growing cost of living, have created a deep dent in savings. This is made worse by the tax laws, which have become regressive, on account of the failure of the government to bring inflation under control.

There are about 500 million people in the country with bank accounts, and at least half of these account holders may have term deposits in some form or other. All these depositors have been getting a negative real rate of return on their savings, due to the growing rate of inflation year after year. Though deposit rates have moved up, inflation has been rising much faster, eclipsing the slower growth in deposit rates. And as if to add insult to injury, the interest received on these bank deposits is subject to income-tax, which is deducted at source by the banks. This is putting an additional burden on the middle class in our country, making it totally unviable to invest in bank deposits. As a result it is driving the common man to invest in unreliable ponzi and money-multiplier schemes, which are thriving at the cost of the not-so-financially-literate middle class and lower middle class, who together constituted about half the country's population.

As if this agony is not enough,  all these bank depositors who honestly pay taxes on the interest received from banks on their deposits, have been suffering in silence for the past several years, because, day by day, they find it difficult to get TDS certificates from these banks, who simply do not bother to give the certificates on time. In the month of July that just gone by, people have been running from pillar to post to get TDS certificates from their banks, to enable them to file their returns on time.

Though it is mandatory for banks to send the TDS certificates to depositors every quarter, without their asking, barring a few banks, none of the major banks bother to send these certificates on their own. And very few bank customers are lucky enough to get the TDS certificates on their first visit to the branch. Because, more often than not, the counter clerks plead helplessness, either because computers are hanging, or they are not printing out certificates due to a software problem. And when you visit for the second time, it is more likely that the person who asked you to come the next day would be on leave and you will be forced to make a third visit to the branch to get what is rightly due to you.  

Another problem depositors' face is that different banks follow different systems of payment of interest and deduction of tax at source. Many banks just credit the net amount of interest after deducting tax, due to which the depositor will not know the amount of tax deducted till the TDS certificate is issued by the bank. In the case of cumulative deposits, where interest gets compounded with the principal, the depositor has no way of knowing the amount of tax deducted till he obtains a TDS certificate from the bank at the end of the year. And if you happen to withdraw the deposit before maturity to meet any emergency, the bank will recover from you some part of the interest already paid to you as penalty for premature withdrawal,  but will not refund any part of tax already deducted from you account.

Ironically, the agony has increased considerably since the introduction of computerisation in banks and income-tax offices. When the banks were operating in a manual environment, handwritten certificates issued by banks were accepted by income-tax offices at their face value and it was possible, though with considerable delay, to get a refund of excess tax paid, based on these certificates. But today, the income-tax department does not rely upon the TDS certificates issued by banks, unless they match with the information contained in the form number 26AS on the income-tax website. And it has been the general experience of bank customers that the TDS certificates issued by banks invariably do not match the 26AS statement of the income-tax department, as it is said that most of the banks outsource this work to private agencies that are not under their control, causing further problems for depositors. This has resulted in income-tax officers issuing demand notices even when appropriate tax has been deducted by the banks.

It is a no-win situation for the common man, as banks put the blame for the mismatch squarely on computers or external agencies, and thus a large number of depositors are left high and dry with no where to go to find a solution to this nagging problem of TDS. {break}
The anguish and anxiety of senior citizens, who almost wholly depend on the interest received from banks for their livelihood, is only to be experienced to be believed. To save themselves from the burden of TDS, they are required to submit form 15H to the banks concerned, at the beginning of every year, if their total income for the year is within the exempted limit prescribed under the Income-Tax Act. And this form is required to be submitted every time they make a fresh deposit with the bank, which is both wasteful and cumbersome.

The common experience of the majority of senior citizens has been that such forms submitted by them many times, either gets misplaced at the bank's branches or are not properly noted in bank's records, due to which tax gets deducted at source, forcing them to undergo the rigmarole of filing income-tax returns to claim refund of tax that has been wrongly deducted by the banks.

These are the real problems faced by a majority of bank depositors in our country. They have nobody to champion their cause as they are the silent intelligentsia, who are helpless pawns caught in this whirlpool of bureaucracy and the cesspool of corruption so rampant in our country. Is TDS, therefore, harassment or a punishment? You be the judge.

Whatever it is, there is an urgent need to find a lasting solution to this double whammy faced by the hapless depositors, who form the backbone of the country's banking system. The only plausible solution to free millions of our country men and women from this agony and suffering caused by the irritating provisions of the law and the complex systems of compliance is to make interest paid by the commercial banks on all their deposit accounts totally tax-free at the hands of the recipients. And this can be achieved without hurting government coffers, if the following suggestion is implemented by the finance minister in right earnest.

In the Finance Act 2003, the then finance minister announced a bonanza for corporate investors. By a stroke of the pen, he abolished income-tax on dividends declared by domestic companies and approved mutual funds, and made it totally tax-free in the hands of shareholders and mutual fund investors from 1 April 2003. This was a great boon to the investors in the stock market, who unfortunately form a microscopic minority in our country. This step mainly helped corporate bigwigs, the high and the mighty, the rich and the wealthy and high net-worth individuals, who invested in the stock market and reaped the rewards of tax-free income. Now there is no TDS, no income-tax and no harassment of investors in the stock market.

In order to compensate the government for the loss of revenue caused by this tax-free dividend, the finance minister introduced simultaneously the dividend distribution tax, to be paid by companies awarding dividends to their shareholders. This worked to the advantage of the government, who got taxes paid in the beginning of the year directly from the companies, when the dividends are declared, instead of collecting in piecemeal from the shareholders throughout the year.

While the this step touched only a fringe of the population, my current request is to extend the same principle to millions of people covering the middle and the lower middle class by declaring the interest received from the scheduled commercial banks free of income-tax at the hands of the recipients, thereby providing much-needed relief to the large body of bank customers and depositors, who have been at the receiving end of the blow caused by rising inflation and poor customer service provided by the banks. This is nothing new considering that all non-resident and foreign currency deposits held by NRIs are already tax-free at present and it is only the extension of such a provision to domestic deposits as well, which will put resident Indians at par with non-residents.

In order to bridge the budgetary deficit that might be caused by this step of freeing bank deposits from income-tax, the finance minister can consider levying interest payment tax on commercial banks at a nominal rate, to be paid by banks along with the advance income-tax remitted by them every quarter. This interest payment tax, based on the total interest outgo of each bank, on the lines of the dividend distribution tax, will be the best substitute for the tax presently levied on each deposit kept with the banks. This extra burden on banks can be easily absorbed by them as this will help the banks to considerably improve their deposit base due to tax-free benefits available on bank deposits and this will help them to increase profitability too, by substantially increasing their lending operations.

The benefits of this exercise for the people, the government and the banks, when implemented, can be summarised as under:

1. The biggest relief will be for the common man who has been suffering from the burden of high inflation and poor customer service from banking institutions.
2. The economy will get a boost as the savings rate will shoot up considerably due to bank deposits becoming an attractive investment destination for the common man.
3. The financial inclusion programme of the Reserve Bank of India will get a shot in the arm as banking will be hassle-free, tax-free and free from the complexities of taxation laws for all those who are brought into the banking system.
4. The banks in the country will be the biggest beneficiaries with bank deposits becoming the most attractive investment avenue for the public, and banks would be flooded with deposits, which through judicious lending, will improve their profitability considerably.
5. Due to the tax-free status of bank deposits, people in rural areas will be attracted to banks to invest their surplus funds, thereby serving the cause of rural population admirably and banks will be keen to open more branches in rural areas, which will benefit both the banks and the rural people.
6. There are about 90,000 branches of banks in India today and they will be saved from the burden of deducting taxes every now and then and filing innumerable returns to several authorities, thereby saving time, energy and money for the banks in the country.
7. The government in turn will benefit from getting taxes directly from banks in one go, helping the government treasury with better cash flow and improved management of funds.

If implemented, this will be one of the most people-friendly measures from any government in power and will go a long way to earn the trust and confidence of millions of people without any loss of revenue to the government. Can we expect the finance minister to act swiftly to change the laws, rules and regulations of income-tax and win the hearts of the people during this tumultuous year?

(The author is a banking and financial consultant. He writes for Moneylife under the pen name 'Gurpur'.)

3 months ago
TDS deduction and payment not only tedious but much expensive & time consuming. Particularly MSME have to spend much more than actual TDS amount to CA or any other outside agency who handles TDS. Same time MSME sector can't effort recruiting people for managing & documenting TDS. Government indirectly killing small scale industries by imposing extensive documentation. In fact small scale industries are helping government by generating employments. Now a days any small mistake is noticeable due to computerisation & this is pushing us back to the Inspector Raj.
chander parkash grover
1 decade ago
it is a great problem, bank are not entering proper PAN detail, due to that
26AS does not match the payment deducted by the deductor on a/c of tds. I can't understand how the problem will be solved. either bank file revise return or assesee contact the clerk/asstt./ITO. they does not work without service charge
Nagesh KiniFCA
1 decade ago
the 42 comments uniformly agree that they are victims of the tedious TDS.
MLF could do well to carry it forward by putting up a Position Paper after a Workshop to discuss this concern in depth. Govind Shanbagh's comment is extremely well made.
1 decade ago
Many people are suffering the draw backs of the TDS system. Personally my assesment for last two Tax returns is pending and Refunds due remain unpaid because the Tax Deductors have not uploaded the TDS on the tax information network. It is incnvenience to the tax payer as well financial losses by way of loss of interest on the held up refunds.
1 decade ago
TDS should not be applied to interest paid by banks on fixed deposits. It generally results in deduction of excess tax from honest taxpayers, and the refund of excess tax never comes
R Nandy
1 decade ago
It is a very unfortunate situation that 15G and 15H forms need to be submitted very year and for every deposit.The IT dept should simplify it by having a single 15G or 15H form for a PAN number with a Bank so that there is no TDS associated with the PAN number.This will simplify life for the senior citizens and prevent errors at the bank level.
Govind Shanbhag
1 decade ago
Mm Dalal Jee - TDS deduction and the resultant after effects with Income Tax has been a hot subject, and many citizens have suffered one time or other. It will be a good idea if you arrange a workshop, invite some senior chartered accountants, bank officials and with your repute some income tax commissioners for a lively discussion. You can even keep this session a paid session with entry fee and I am sure many will be benefitted.
Govind Shanbhag
1 decade ago
Dear Shri Varshaney Sir - If you are having a problem with SBI, just send an sms on no.8008202020 (i repeat -8008202020) and type "unhappy", you will be surprised to get instant calls from all over and within 48 hours your problem will get solved. All the best.
RS Varshneya
Replied to Govind Shanbhag comment 1 decade ago
Your suggestion is really great. I sent unhappy message, and some one from SBI/Mumbai responded. Since this issue is from Delhi the message has been transferred to Delhi. I am thankful for such a simple and great suggestion. Can I share this with my other friends?
Govind Shanbhag
Replied to RS Varshneya comment 1 decade ago
Dear Sir Varshneya jee - why not? This is being monitored by some senior Dy.Managing Director. If you have any problem with State Bank - please send me a mail on [email protected] - i should be able to help you. In return "delhi chaat" in south delhi road side joints. All the best.
R S Varshneya
1 decade ago
I fully agree with the article. SBI/Rail Bhavan New Delhi where I hold my FDs have never issued correct F16. The entries in 26AS are much lower than what is deducted in the name of TDS. I use internet to know status of interest credited and TDS deducted. I have always found that 26AS do not show all the TDS and therefore I am forced to declare wrong income in my income tax returns.I write every week to Bank Manager to correct the 26AS by crediting all thr TDS deducted but he never ever has replied my any letter. I do not know to whom to approach and get the nagging problem set right.
Deepak Gupta
1 decade ago
Certificates issued by PSU banks like SBI does not matched at all. Why the hell income tax office issues notice to them and penalise the concerned officer along with the bank for their failure to file the correct returns. They should be heavly fined fot their gross negligence.
Prabal Biswas
Replied to Deepak Gupta comment 1 decade ago
I am with you Mr Deepak Gupta. The staff of most PSU banks along SBI think they are God's gift to man kind. They do us a favor by working. The ugly side nationalisation.
Nagesh KiniFCA
1 decade ago
I've just been informed by the Manager of a PSU Bank that the Income Tax Dept. has served a notice asking him to show cause why penalty should not be levied. So much for doing the job of an unpaid tax collector!
1 decade ago
TDS is realy hazardous to citizens.
Bhalachandra Singde
1 decade ago
It is true that it is harrassment. Why to give the forms for not deducting income tax at source every year? Once I failed to give those forms, the Bank cooly deducted tax and when I claimed the same, it was allowed but the refunds I never got.
gp singh
1 decade ago
All that and the worse is that TDS is applied to NRO Accounts even if you earn interest of Rs 50 per year! TO GET BACK A REFUND OF Rs 5 HOW MUCH WILL IT COST THE GOVT AND THE TAX PAYER!
Govind Shanbhag
Replied to gp singh comment 1 decade ago
Mr.GP SINGH Sir - As per existing income tax rules entire interest earned on NRO savings and fixed deposit is taxable @ 33.30% irrespective of amount. However, if the country where the NRI is wroking has entered into double taxation treaty, then Bank is bound to deduct TDS at 10/12.5/15% - depending on the terms of treaty. However such NRIs have to submit DTAA every year (DOUBLE TAXATION AVOIDANCE AGREEMENT) which is almost like resident indians 15G/H form. However, if NRIs do not submit DTAA form, including after expiry of financial year it is mandatory to deduct tax at 33.3% (even when double taxation treaty is in vogue) and the concerned NRIs has to claim refund only filing tax return.
Sam Pochkhanawala
1 decade ago
I agree full heartedly with the author. I'm unable to claim the refund due to me due the mismatches made in my 26AS report. Whenever I approached my bank(s) all they tell me is that its not their fault and they have submitted their deductions correctly. In one case the bank has deducted more TDS than the report submitted by them to TIN. All queries fall on deaf ears of indifferent executives at the bank(s).
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