Understanding taxation of small savings schemes

AFTER a failed attempt at taxing EPF withdrawals, the government has put its foot down on deregulating interest pay-outs from small savings schemes. Even though interest rates have been slashed, some of these schemes continue to offer tax benefits.

Preeti Khurana

Tax benefits on PPF and Sukanya Samriddhi Account: Deposits made in schemes such as PPF and Sukanya Samriddhi Account (SSA) continue to be eligible for deduction under Section 80C. Therefore, these are still in the favourable bucket as these are in the EEE category. Your investment is eligible for tax deduction, returns are tax-free and so are the withdrawals. A maximum of R1.5 lakh can be claimed as a deduction under section 80C in one financial year. SSA can be closed when the girl child attains 21 years of age. However, if the amount is not withdrawn, it shall continue to earn interest. Deposits are allowed to be made up to 14 years from the date of opening of the account.

Tax on income from 5 year NSCs: Interest earned from NSCs is fully taxable. Since it is reinvested, it can be claimed as deduction under section 80C. During the term of NSCs, each year you must include interest under ‘income from other sources’ in your tax return and you can claim the same amount as deduction under 80C. Except in the last year, when the NSC matures and interest earned is paid out.

Tax on income from other schemes: Interest income earned from other small savings schemes such as Kisan Vikas Patra, Senior Citizen Savings Scheme of post office, recurring deposits and post office time deposits and Monthly Income Schemes are fully taxable. Interest income from these schemes is either credited to your account or reinvested. As a thumb rule, such interest income must be reported in your income tax return every year. Include it under the head ‘income from other sources’. Even if interest income is reinvested and is only paid on maturity, it is wise to include it in your income tax return for that year and pay tax on it each year rather than on maturity.

If you wait until maturity to declare interest income as a lump sum, there may be a possibility of being pushed to a higher tax slab and you might end up paying higher taxes. To avoid this situation, find out the interest accrued and pay tax on it on an annual basis.

A lot of taxpayers choose to reinvest maturity proceeds from NSCs or Kisan Vikas Patras. In such cases, remember that the returns from the initial investment shall be taxed, even if the proceeds have been reinvested. You must include the income earned in your return each year.

TDS on small savings schemes: TDS deductions do not apply to post offices, even though the interest income paid is fully taxable. Post offices have to deduct TDS on Senior Citizen Savings Scheme (rules) 2004, only if your interest income exceeds R10,000 in one financial year. If the interest income they pay is fully taxable; the onus of paying tax on them is on the taxpayer even though no TDS is deducted. Remember to include these in your total income and calculate and pay tax on them.

If you earn a significant interest income, advance tax rules may also apply. Now that the last date for depositing advance tax (March 15) is already past, you must try to pay your tax dues before March 31 to minimise penal interest. If you are a senior citizen, and you have deposited in Senior Citizen Savings Scheme with post office; you can submit Form 15H if your total income (from all sources) is less than R2,50,000. The writer is chief editor at www.cleartax.in and a chartered accountant