Breaking an FD? Why senior citizens must check Form 26AS first to avoid tax trouble

For senior citizens, banks deduct TDS on FD interest only if the total interest exceeds Rs 1 lakh in a financial year. Further, there is also a relief under Section 194P. If a senior citizen earns only a pension and interest income from a specified bank and meets certain conditions, filing an income tax return may not be necessary. 

Therefore, it is important to verify whether the bank has reported the transaction under Section 194P or Section 194A, since this directly impacts the ITR filing requirement.

How does interest earned on FDs reflect in Form 26AS, and what common mismatches should seniors watch for?

Banks generally deduct TDS on an accrual basis – meaning tax is deducted as interest accumulates, even if the FD has not matured and the money has not been received yet. However, many senior citizens pay tax on a cash basis, where income is reported only when actually received. 

This difference often creates confusion. If TDS has already been deducted on interest that you have not yet offered to tax, the TDS credit shall be carried forward and claimed in the year the income is finally reported. The important thing is to consistently follow one method and ensure the same is properly reflected in the income tax return.

Can breaking multiple FDs before or after March 31 affect tax liability?

“Tax is payable only on the interest earned and not on the principal amount. However, if multiple FDs are broken in the same financial year, the accumulated interest can significantly increase taxable income and even push a senior citizen into a higher tax slab. This is especially relevant for those following the cash basis of accounting, where the entire interest becomes taxable when the FD is broken, and the money is received. Under the accrual method, interest is spread over earlier years, reducing the tax impact in the year of maturity or closure,” said Deepesh Chheda, Partner, Dhruva Advisors. 

Form 26AS can help senior citizens make this decision more efficiently by showing how much interest income has already been recorded during the financial year. If total income is already close to a higher tax slab, it may be better to wait until April 1 so that the additional interest gets taxed in the next financial year. On the other hand, if income for the current year is relatively low, breaking the FD before March 31 could be more tax-efficient.

Before breaking multiple FDs, it is advisable to estimate the total yearly income, review the interest already reflected in Form 26AS, and consider staggering FD closures across two financial years if that helps reduce the overall tax burden. At the same time, financial requirements should take priority, and the focus should remain on correctly reporting the income in the ITR.

What should senior citizens do if the FD interest in Form 26AS does not match the bank certificates or passbooks?

Differences between Form 26AS and bank statements or interest certificates are quite common. The first step is to inform the bank and request a correction if interest or TDS has been wrongly reported. While filing the income tax return, taxpayers should disclose the actual income received and not rely blindly on Form 26AS figures. 

It is also advisable to keep supporting documents such as bank statements, passbooks, interest certificates, and emails exchanged with the bank. These documents can help resolve any future queries from the tax department. In short, Form 26AS gives senior citizens a clear picture of their tax position and helps them make better financial and tax decisions before breaking their FDs.

If a discrepancy is discovered, senior citizens may consider the following steps immediately:

1) Approach the Bank for Correction: If there is an error by the bank in reporting the amount of income or TDS, the senior citizen must request the bank to file a *correction statement / amend its TDS filings. Once the bank rectifies its filings, the Form 26AS / Annual Information Statement (AIS) reports of the senior citizen will automatically update to reflect the rectified/revised position.

2) Access the AIS Feedback: Senior citizens should also check their AIS. If the information there is incorrect, they can submit online feedback directly on the e-filing portal, marking the information as ‘Incorrect’ and providing reasons for the same.

Senior citizens need to be mindful of

Banks are mandated to deduct Tax Deducted at Source (TDS) under the Income-tax laws if the total interest earned on deposits exceeds the prescribed thresholds (for senior citizens) in a financial year. This deducted tax, along with the gross interest paid or accrued, is reported by the bank via quarterly TDS returns and gets reflected in the payee’s Form 26AS. According to Ashish Mehta, Partner at Khaitan & Co, therefore, senior citizens need to be mindful of:

1) Accrual vs. Receipt Mismatch: Banks often report interest on an accrual basis (annually), whereas individuals might offer tax on a cash/receipt basis (for instance, upon maturity). This creates a variance between the actual credits in bank statements and Form 26AS (as TDS needs to be deducted on payment of credit, whichever is earlier and banks will need to accrue interest in their books irrespective of whether the FD holders are following the cash system of accounting.

2) PAN Errors: If the bank registers an incorrect PAN, the TDS and interest income will not reflect in the senior citizen’s Form 26AS at all. Or at times, entries not belonging to the senior citizen may erroneously appear against one’s PAN in view of a data entry mistake on the part of the bank. 

3) Joint Accounts: In joint FDs, banks may attribute the entire interest and therefore withhold TDS to the credit of the first holder. If the second holder is the actual investor paying the tax, this requires manual adjustments during Income Tax Return (ITR) filing.

Key takeaways

Form 26AS acts as a real-time financial ledger. A senior citizen can review these forms to assess exactly how much taxable income has already been accrued to them for the current financial year (and even previous years, where FDs are for multiple years). This data point, along with the details of other incomes earned by the senior citizen, may be relevant in deciding whether to break the FD before or after a financial year.

Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.    

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