If two persons are asked about income tax law in India, you will get four opinions. This is specially true when it comes to tax deduction at source (TDS). There is nothing as knotty and tangled as the provisions on TDS.
Before looking at ways to avoid TDS, let us see the three types of incomes received by a resident Indian investor that attract the TDS provisions: interest earned on securities, interest other than interest on securities, and income in respect of mutual fund and Unit Trust of India (UTI) units.
Interest earned on securities
A debenture issued by a company held by an investor is most likely to be categorized under this head. On the debenture, TDS is deductible on the interest, either during the time of actual payment of such interest or during the time of credit of such interest payable to the account of the payee, whichever happens earlier. TDS payment on a debenture can be avoided if the interest earned on the debenture on which interest is to be paid is listed and the interest payer is also a listed company and if the interest paid/payable during that financial year is not in excess of Rs. 2,500 and the interest earned is paid as an account payee cheque. If it is felt by such investors that tax on their total income from all sources for the year is likely to be nil, and they want the interest on securities to be received without any deduction of TDS, they have to fill up the form 15F and file a declaration with the company that is paying them the interest. False declaration should be avoided at all cost, which many investors might want to use to avoid deduction of tax even as their total income is more than the taxable limit. In such a case the investor willfully is making a false statement which amounts to an intentional breach of law. Thus the investor is liable to be prosecuted and punished on conviction.
Interest earned other than interest on securities
Besides interest on securities, any other type of interest, such as company deposits, is also liable for deduction of TDS, except when the payer is an HUF or an individual. TDS is applicable either during the time of actual payment of the interest or during credit of such interest, whichever happens earlier. 20 per cent of gross interest is the rate at which TDS is deducted if the receiver is a domestic company and 10 per cent of the gross interest at which TDS is deductible if the receiver is a non-corporate resident.
Avoiding TDS: No TDS is deductible on the interest earned from some of the government certificates and deposit schemes like, KVP(Kisan Vikas Patras), NSS(National Savings Certificates) and IVP(Indira Vikas Patras), the post office recurring deposit scheme, time deposit and monthly income accounts. Also, There is NO TDS applicable on the amount of interest paid/ payable by co-operative society engaged in banking business or institutions other than a bank during a financial year if that amount is less than Rs 2,500. In the case of time deposits, also called fixed Deposits, with a bank or a financial institution dealing in Home loans like HDFC, no TDS is applicable if the interest payable from that branch for the year does not exceed Rs.10,000/-.
Depositors quite often try to circumvent this rule by distributing their deposits across different branches so that the interest in a particular branch in a single financial year is not in excess of Rs. 10,000/-. No TDS is applicable on interest earned on recurring deposits and saving bank accounts. TDS is also not applicable on the interest paid by co-operative banks to the shareholders on their deposits.
If for a financial year an investor feels that tax on his income from all sources may be nil, he can file a declaration through form 15H, which may then be submitted to the interest paying institution so that no TDS is deducted.
Income Earned from UTI/MFs
There is no TDS applicable to all earnings from income from UTI and MFs.