For the first time, TDS on RBI bonds !!

Last updated: 13 September 2007 Follow on Google News

Perhaps the most favoured savings instrument of Indian investors is the 8% RBI Savings Bond. Safe to the hilt, it has retained its popularity in spite of the sharp appreciation in interest rates in recent times.

So far, the interest on the bonds, though taxable, was not subject to tax deduction at source (TDS). However, this was too good to last and with effect from June 1, 2007, any interest exceeding Rs 10,000 has become subject to TDS, as per notification No. F.4 (10) - W & M/2003 of the ministry of finance

Albeit, there is a problem with the notification — while specifying that TDS will be applicable, it doesn’t specify the rate thereof. And as is wont, in the absence of clear cut instructions, there is confusion galore. The first half-yearly interest, which was hit by TDS, fell due in August, and some investors found that TDS @10% has been deducted, whereas others have suffered a 20% deduction.

So, what is the correct rate? For ascertaining this, one has to refer to Sec. 193 of the Income Tax Act read with Part II of the First Schedule to the Finance Act 2007. Sec. 193 specifies the securities on which TDS will be applicable and the Schedule specifies the exact rate thereof.

Hitherto, since interest on all government securities (including RBI Bonds) was free of TDS, the Schedule never contained any deduction rate as such for such instruments. Now, while the bonds have been subjected to TDS and a consequential amendment has been carried out in Sec. 193, the Schedule has remained untouched.

Therefore, one has no option but to adopt the 20% rate specified under the residuary clause for other income. If the government indeed intends the applicable rate to be 10%, a notification clearly spelling out as much would be required to clear the confusion.

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