The small savings rate cut has been reversed, but investors in these schemes have other problems looming in the horizon. The government has introduced new rules for TDS on small savings schemes. If an investor withdraws more than ₹20 lakh from post office schemes, including the PPF, TDS will be withheld from the withdrawal balance if income tax returns have not been filed for the previous three assessment years. The TDS will be 2% of the amount exceeding ₹20 lakh withdrawn from the Post Office schemes during a financial year. If the amount exceeds ₹1 crore, TDS will be 5% on the amount in excess of ₹1 crore. This provision under Section 194N of the Income Tax Act 1961 came into effect from 1 July 2020.
Even tax filers have not been spared the TDS. If cash withdrawals exceed ₹1 crore by an ITR filer in a financial year, the TDS will be 2% of the amount above ₹1 crore.
Tax experts say this will ensure that tax-free options such as the PPF and other Post Office schemes are not misused by non-filers. HNIs are known to put large amounts into PPF accounts opened in the names of family members who don’t have any income of their own. These people don’t file their returns even though they have huge investments in Post Office schemes.
The new TDS rules are designed to put an end to these dodgy practices and push more people to file their tax returns. It will also force tax filers to declare such investments in their tax return. Even though PPF interest is tax free, it has to be declared in the tax return under the head ‘exempt income’. Most people don’t declare the interest income in their tax return.
