QUESTION: You have recently highlighted difficulties encountered by those investors in cumulative time deposits, who have to face tax deduction at source on annual interest, though it is neither received nor receivable during the year with consequent difficulties in getting credit of tax so deducted by filing Form 15G or 15H to avoid such deduction. You would probably like to inform your readers that the Board has responded to this grievance by a Circular, which you may share with the readers.
ANSWER: The inference drawn by the reader from the referred Circular No.3 of 2010 dated March 2, 2010, is not correct.
On a representation from the Indian Banks' Association, the clarification from the Board is confined to provisioning of macro-monitoring by the use of CBS software.
In fact, the Circular reiterates its earlier view that “tax shall be deducted at source on accrual of interest at the end of financial year or at periodic intervals as per the practice of the bank or as per the depositor's/payee's requirement or on maturity or on encashment of time deposits, whichever event takes place earlier, whenever the aggregate of amounts of interest income credited or paid or likely to be credited or paid during the financial year by the banks exceeds the limits specified in Sec. 194A.”
The reasoning in the Circular is self-contradictory. The logic in excluding the duty to deduct tax, where the credit is made for “macro-monitoring” should be equally applicable for such provisioning as at the end of the year. Reference to “constructive credit” as distinct from other credits is too academic.
Provision for interest, which is accrued but not due may be real for the bank, but it is contingent for the depositor.
Tax deduction even under the law should be understood as not required, where there is no right to receive the amount, whether provisioned or not.
A distinction is certainly possible as between the credit which gives the right of immediate withdrawal and one which requires the depositor to wait for the agreed period under the contractual terms of the deposit.