My mother is a retired government employee and she has invested in fixed deposits (FDs), recurring deposits (RDs), National Savings Certificates (NSC) and Senior Citizens Savings Scheme (SCSS). Will she have to pay tax? How can she save tax? Does she need to file returns every year?
Under the Income-tax Act, an individual is required to pay tax in case her taxable income during the financial year (FY) exceeds the basic income exemption threshold prescribed for that FY. In case of a senior citizen (above the age of 60 years and below 80 years), the income exemption threshold for FY13 is Rs.2.5 lakh. In other cases, the limit is Rs.2 lakh.
The interest earned on FDs, RDs, NSCs and SCSS shall be taxable as “income from other sources”. She could claim a deduction for interest on saving bank up to Rs.10,000 per FY.
Regarding the taxability of interest income, she has the option to either offer “income from other sources” on cash (receipt) or mercantile (accrual) basis. However, in case, the interest on FD, RD and SCSS is subject to tax deduction at source (TDS), credit of TDS can be claimed only in the year when such income is offered to tax. In such a case, it has to be ensured that correct disclosure is made in all the forms (form 26As, form 16A) and personal tax return with respect to the FY in which tax was deposited and the credit is claimed.
Interest on NSC accrues every year and is reinvested at the end of each year. Therefore, as the interest is reinvested, deduction could be availed for reinvestment under section 80C up to Rs.1 lakh per FY. In the last year of the NSC scheme, however, as there will be no reinvestment, the deduction under section 80C will not be available and the interest for the year should be offered to tax.
Your mother could avail an exemption up to Rs.1 lakh in respect of investments in NSC and five-year term deposits with bank/post office. Additionally, she may consider avenues such as Public Provident Fund, units of specified mutual funds and bonds. The above investments are subject to conditions as specified under the Act.
In case her income after considering the prescribed exemption/deduction exceeds the threshold, she would be required to pay tax and would be mandatorily required to file tax returns. If her taxable income exceeds Rs.10 lakh or she has overseas assets, she would be required to file online returns.
Please note that there are provision for payment of taxes through advance tax during the year, but from FY13, resident senior citizens who do not have income from business or profession are exempted from paying tax in advance during the FY as per the prescribed instalments. Accordingly, now the senior citizen could pay tax after the FY ends on 31 March as “self assessment tax” on taxable income before filing returns.
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Parizad Sirwalla is partner (tax), KPMG.