NEW DELHI: You will now have to pay tax on interest earned beyond3,500 on a postal savings bank account. In a recent decision, the Central Board of Direct Taxes , the apex direct taxes body, withdrew the blanket exemption enjoyed hitherto by the scheme.
The exemption will be available only on interest earned up to3,500 in case of individual accounts and7,000 in case of joint accounts from the current fiscal year itself. Experts say some of the concessions granted earlier had to be reviewed to see if they were in line with the current economic reality or had outlived their utility.
"It's part of the government's initiative to widen the tax net," said Vikas Vasal, executive director, KPMG . He said the benefits also need to be evaluated to study their relevance. The exemption on the postal savings account was introduced in 1989.
With post office savings account coming under tax net, interest earned beyond the exemption limit will have to be added to a taxpayer's total income and tax paid accordingly. The current interest rates for Post Office savings deposits is 3.5% per annum. Investors can open this account with a minim deposit of50.
The maximum investment limit is1 lakh for an individual and2 lakhs in case of joint accounts. A government committee recently suggested bringing all postal saving schemes in tax deducted at source net under the new direct taxes code regime.
"This has been done at the behest of the department of post," said an income tax official. The finance ministry-appointed panel on small savings had also recently recommended removal of this exemption. The move also comes in the backdrop of concerns over people opening multiple accounts in different post offices in view of the investment threshold.
By capping the tax-free income and making reporting of such income mandatory, the income tax department would be able to effectively prevent any such misuse. At present, interest paid by banks in savings account is taxable and only postal savings account offered a tax-free interest income.
"The move is in line with the direct taxes code and creates a level playing field between the two," the official said.
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