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The tangled knot of TDS

A N Shanbhag

A client of mine once complained that if you ask two persons about Indian income tax law, you will get five opinions. This is specially true when it comes to tax deduction at source.

There is nothing as tangled and knotty as the provisions on TDS. While some TDS rates are specified in the individual section that deals with the tax treatment of the particular stream of income, some rates are included as part of a separate schedule.

To make matters worse, these rates are modified in every budget. This results in a great deal of chaos and confusion.

The problem lies in the complicated nature of the tax laws. The authorities complain that less than 2 per cent of our population pays taxes.

In an effort to bring more people under the tax net, the lawmakers simply end up complicating the law.

I don't understand the reason for having different rates for different incomes. Its not as if the TDS is the final tax payable - the assessee at the time of filing his return pays the balance if any or asks for a refund, as the case maybe.

I sifted through the Income Tax Act in an effort to bring together the elusive provisions and the various rates of TDS. Here's what I found.

(The rates mentioned below do not include surcharge. The 5 per cent surcharge has to be added to the base rate.)

Dividend from shares

The rate is 10 per cent on dividend above Rs 2,500. Budget 02 had specified the basic threshold as Rs 1,000. However, it was increased by a later amendment.

Dividend from units of MFs/UTI

The rate is 10 per cent above dividend of Rs 2,500 for residents - this was similarly increased as above.

Interest on securities

As per Section 2(28B) of the ITA, "interest on securities" means (i) interest on any Central or state government security, (ii) interest on debentures or other securities issued by a local authority or a corporation established by a Central, state or provincial act.

In the above case, the TDS rate is 20 per cent on interest above Rs 2,500.

Interest other than interest on securities

The rate in this case is 10 per cent on interest above Rs 5,000. Earlier, in the case of interest on deposits with banks and housing finance companies, a higher threshold limit of Rs 10,000 was applicable.

However, from June 1, 2001, the uniform limit of Rs 5,000 is applicable for all interest payments under this provision. Do note that the limit of Rs 5,000 is applicable per branch of the bank.

Winnings from horse races, lotteries

The rate is 30 per cent without any threshold. Winnings in kind are also liable for full TDS based upon the value of the item won.

Insurance commission

The rate is 10 per cent on commission exceeding Rs 5,000.

NSS deposits

If the withdrawal amount is Rs 2,500 or more the rate is 20 per cent. Payment made to the legal heir of the assessee is not subjected to any TDS.

Commission or brokerage

The rate is 5 per cent on amounts exceeding Rs 2,500 for the financial year.

Repurchase of units under Section 80CCB

The Section 80CCB deduction (a 100 per cent income deduction) was withdrawn in FY92. Any repurchase of units bought under a Section 80CCB scheme would be subject to a 20 per cent deduction on the principal amount.

Fees for professional or technical services

The rate is 5 per cent if the amount for the financial year exceeds Rs 20,000.

Any other income apart from the above

The rate is 20 per cent.

Escape routes

Residents can avoid TDS by filing specified forms with the payer of the income. Section 197A(1) is related with Forms 15-G and 15-I for individual deriving income from dividends on shares, including preference shares and withdrawals on NSS, respectively.

Similarly, as per Section 197A(1A), a person earning interest from securities and income from mutual funds can file Form 15-H with a similar declaration and avoid TDS.

The assessee has to declare that 'the tax on his estimated total income of the previous year in which income from specified sources in which such income is to be included in computing his total income will be nil.'

FA02 has imposed additional restrictions on the freedom to file the forms by adding a new subsection 1B to Section 197A.

Simply put, an assessee does not have a right to file the forms if his aggregate income of the nature referred to in subsections '1' and '1A' exceeds Rs 50,000. Note that these limits are separate and one does not have any relation with the other.

In other words, the total income from (i) dividend on shares and withdrawals from NSS and, ii) interest on securities, and other than on securities and income from units of UTI/mutual funds individually has to be less than Rs 50,000 but together, can go up to Rs 1 lakh (Rs 100,000).

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