TAX BENEFIT ON SAVING BANK INTEREST

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Query 1] 

My saving bank account is in SBI. The amount in the saving bank account get converted to MOD. The MOD (Multi Option Deposit)(tax benefit) account is a combination of your transactional (debit) account and deposit account. Thoug this are deposits, but at the time of need for funds, withdrawals can be made in units of Rs.1,000/- from the deposits by issuing a cheque from Savings Bank Account or from ATM / branch or through any other channel.

This kind of deposits is completely liquid. The sum of available balance in the transactional account and MOD balance can be used for issuing cheques or withdrawal or making any other payment. The bank has deducted TDS on the MOD interest. Can’t Section 80TTA applied here?

[Prajakta Kuralkar-pskuralkar@rediffmail.com]

Opinion:

  1. Section 80 TTA provides for deduction of interest on deposits in saving account up to a maximum of Rs. 10,000/- and explicitly provide for exclusion of interest on “time deposits” from deduction.
  2. Sweep in /out facility or MOD as you have mentioned in the query in a saving bank. account is a benefit providing combination of both. saving A/c as well as fixed deposit A/c. It allows account holder to transfer funds (automatic or manual) from saving a/c to virtual. fixed deposits accounts and vice versa too, to enable higher interest. The important question remains, whether interest, for the purpose of section 80TTA includes interest from deposits in Sweep or Flexi Account?
  3. Though deposit in such Flexi/Sweep Account is a kind of term deposit, explanation to section 80 TTA clearly provides that “for the purpose this section, ‘time deposit’ means deposit repayable on expiry of fixed period”.
  4. In normal course, Sweep Transfers or MOD are never repayable on expiry of fixed period even though there may be a fixed period for crediting interest thereon. Sweep transfers, in general, are repayable on demand & not after a fixed period. It appears to be an extension of saving account only as the customer has to merely issue a cheque for withdrawals and these deposits automatically get transferred in the account to the extent of required payment.
  5. In my opinion, the interest would be covered by section 80TTA and deduction up to maximum of Rs. 10,000/- would be admissible in such cases. The biggest hurdle in your claim u/s 80TTA could be the TDS done by the bank in respect of interest paid in such saving account. As per Section 194A (3), no tax is required to be deducted (TDS) on the following:
    “(vii)  to such income credited or paid in respect of deposits (other than time deposits made on or after the 1st day of July, 1995) with a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act)”.
    To be more precise, Saving bank account interest doesn’t attract TDS provision. In the given case, TDS by bank on the interest reflects that the bank have treated MOD as time deposit and accordingly have deducted Tax at source (TDS) on the interest component. Still, in my opinion deduction of tax at source by the bank, following conservative approach, may not hamper your claim u/s 80TTA.

Query 2]

I have a query on TAX on PF withdrawal. I am working in a private firm since 28th December-2009 in Pune and contributing in recognized PF trust run by the same firm. A letter was issued by the employer mentioning that I have joined the PF fund on 28-12-2009 and annual PF statement also mentions same joining date. However, after joining the job, I took 2 months leave without pay and my salary (also PF contribution) was actually started from 07-Feb 2010 (no service break letter was issued). 

Now, I am planning to join another company which is under NPS.
My question is if I leave the current job on 27-12-14 i.e., just completing 5 years of service and want to withdraw my PF, Will the withdrawal PF amount will be taxable? [Abhijeet- s******@yahoo.com]

Opinion:

  1. Rule 8 of the Part A of the Fourth Schedule to the Income Tax Act-1961, lays down conditions on the fulfillment of which the accumulated balance due and becoming payable to an employee participating in a recognised provident fund is to be excluded from the computation of his total income. These conditions are:
    (i) he should have rendered continuous service with his employer for a period of five years or more, or
    (ii) in a case where he has not rendered such continuous service, the service should have been terminated by reason of employee’s ill health or by the contraction or discontinuance of the employer’s business or other cause beyond the control of the employee, or
    (iii) if on cessation of employment, the assessee has obtained employment with any other employer, the accumulated balance due and payable to the employee should have been transferred to his individual account in any recognised provident fund by such other employer. (In such a case, if a part of accumulated balance is transferred, the exclusion from total income would be such part of total income).
  2. If the conditions enumerated above are not satisfied, accumulated balance is liable in accordance with the mode provided in Rule 9 to part A of schedule IV as mentioned above.
  3. The important question is how to compute the period of 5 years as mentioned in 1(i) above. The fact mentioned in the query reflects that you have joined the company on 28th Dec-2009 & have been officially granted leave for 2 months. In my view, the period of leave granted officially cannot be reduced to compute the period of 5 years. To be precise, I am of the view that you would be completing the period of 5 years on 27.12.2014 & if you leave after 27.12.2014, the accumulated balance may not attract income tax as per the provision of section 111 of the Income Tax Act-1961.

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