I have invested a sum of Rs 10 lakh in 8% RBI Savings Bonds. In respect of the interest payable for August 07, there has been a TDS of 20% on the interest. The surprising thing is that another friend of mine, who had a similar investment through another bank, has had only 10% deducted. First of all, how is it that all of a sudden this TDS is applicable? And secondly, what is the correct rate?

?Alok

So far, the interest on the bonds, though taxable, was not subject to tax deduction at source (TDS), thanks to the Ministry of Finance Notification F4 (10)-W&M/2003 dated January 13, 2004 stating that TDS is not applicable. However, with effect from June 1, 2007, any interest paid or payable during a financial year, exceeding Rs 10,000, will be subject to TDS (Notification No F.4 (10) – W&M/2003 dated May 31, 2007.) Now, the problem with the abovementioned notification is that while specifying that TDS will be applicable, it doesn’t specify the rate thereof. This is why you find some banks deducting the same at 10% and the others at 20%.

For ascertaining the correct rate, one has to refer to Section 193 of the Income Tax Act read with Part II of the First Schedule to the Finance Act 2007. In other words, Section 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.

However, now that the bonds have been subjected to TDS, though a consequential amendment has been carried out in Section 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.

My father has sold a house and to save the capital gains was in the process of buying another property, which was under construction. Hence, he had parked the capital gain amount in the Capital Gain Account Scheme (CGAS), from which he was making periodical payments to the builder. Last month, he unfortunately passed away following a sudden heart attack. Now as the nominee, I am to receive the unused portion of the deposit. Would the same be taxable for me and do I have to use it similarly for paying for the property?

?Mundra

If the assessee dies before the expiry of the stipulated period (for purchasing the new asset), and later on, the unutilised amount is refunded to the legal heirs, the Board is of the opinion that in such cases the said amount cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of legal heirs also, as the unutilsed portion of the deposit does not partake the character of income in their hands, but is only a part of the estate devolving upon them – Circular No 743 dated May 6, 1996 Therefore, there would be no tax in your hands on the amount received by you. You may or may not continue to use this money to make the payments for the property under construction.

I am a medical doctor by profession. I have a PPF account, opened in 1986, matured in 15 years i.e. 2001, one extension for 5-years done, which also expired in March 2006. I have neither extended it nor withdrawn it. Now my query is that after the account matures, will I continue to get the tax-free interest till I withdraw or will interest cease after March 31, 2006? In the latter case can I request another 5-yr extension now?

?Dr. Mahale

At its maturity, the PPF can be continued for a block of 5 years. This facility is available for any number of blocks on expiry of the extended term. The continuation can be with or without contribution. Once an account is continued without contributions for one year, the subscriber cannot change over to with-contributions extension. [Notification F.3(6)-PD/86 dated August 20, 1986]. A subscriber, continuing his account with fresh subscriptions, can withdraw up to 60% of the balance to his credit at the commencement of each extended period in one or more installments, but only one per year. On the other hand, in the case of account extended without contribution, withdrawals can be effected in installments, not exceeding one in a year. The balance will continue to earn interest till it is completely withdrawn.

?The authors may be contacted at wonderlandconsultants@yahoo.com