The small savings rate cut has been reversed, but investors in these schemes have other problems looming on the horizon.
The government has introduced new rules for tax deduction at source (TDS) on small savings schemes. If an investor withdraws more than Rs 20 lakh from post office schemes, including the PPF, TDS will be withheld from the withdrawal balance if income tax returns have not been filed for the previous three assessment years.
The TDS will be 2% of the amount exceeding Rs 20 lakh withdrawn from the Post Office schemes during a financial year. If the amount exceeds Rs 1 crore, TDS will be 5% on the amount in excess of Rs 1 crore.
This provision under Section 194N of the Income Tax Act 1961 came into effect from 1 July 2020. Even tax filers have not been spared the TDS.
If cash withdrawals exceed Rs 1 crore by an ITR filer in a financial year, the TDS will be 2% of the amount above Rs. 1 crore.
Tax experts say this will ensure that tax-free options such as the PPF and other Post Office schemes are not misused by non-filers. HNIs are known to put large amounts into PPF accounts opened in the names of family members who don’t have any income of their own. These people don’t file their returns even though they have huge investments in Post Office schemes.
The new TDS rules are designed to put an end to these dodgy practices and push more people to file their tax returns. It will also force tax filers to declare such investments in their tax return. Even though PPF interest is tax-free, it has to be declared in the tax return under the head ‘exempt income’. Most people don’t declare interest income in their tax returns.