There are three mains reasons why people keep deposits in co-operative banks. One, the bank is closer to their home and the staff there is more friendly compared to the staff in nationalized banks. Two, the bank offers higher rate of interest compared to nationalized banks. Three, the interest on bank deposits are not subject to TDS provisions!
Friends, the third reason is no more applicable! The Finance Bill 2015 has plugged this loophole and made the interest earned on deposit at co-operative banks subject to TDS, like any other nationalized banks.
How people were avoiding TDS?
Actually, who keeps deposit in cooperative banks when so many nationalized and private banks are around? It is the senior citizens/ retired people who park their money in co-op banks. In order to avoid Income tax, they split the deposits between husband and wife, open accounts in different co-op banks depositing amounts, the interest on which is less than Rs.10,000! You may be aware that the interest earned upto Rs.10,000 per year is exempt from TDS.
Secondly, if you become the member of the bank (shareholder) then even if the interest is more than Rs.10,000 no TDS is applicable. Thus people are taking the membership of the co-ops and avoid TDS.
TDS is applicable from 1st June, 2015
This may not be good news for TDS avoiders! Section 194A of Income Tax is amended w.e.f. 1st June 2015 wherein even if you are a member of coop bank, TDS has to be done!!
Secondly, interest earned on Recurring Deposit (RD) is also subject to TDS.
The existing exemption to primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank from deduction of tax in respect of interest paid on deposit shall continue to apply.
What happens if one keeps money in different branches of the same bank to avoid TDS?
The basic exemption of Rs.10,000 to be considered is for a bank as a whole, not branch wise! So, now on, if the bank has core banking solution, the threshold limit will be calculated for the bank as a whole.
Lower or Nil Deduction of tax benefit
The depositors can avoid TDS on interest by submitting form 15G (by Individuals) or form 15H (by senior citizens) to the banker if their total income is less than the taxable income.
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Thought for the day
When saving for old age, be sure to put away a few pleasant thoughts.