In Budget 2024, it was announced that starting from October 1, 2024, tax deducted at source (TDS) will be deducted at a 10% rate from specified central and state government bonds, including floating rate bonds.
“In the Union Budget 2024, the Government has proposed a 10% TDS on all central government securities, state government bonds, and state development loans (SDLs), effective from October 1, 2024,” says Vijay Kuppa, CEO, InCred Money. This move is likely to have a big adverse impact on investors who primarily depend on the interest earned from such government securities.
The Floating Rate Savings Bond will come under this new TDS rule. “Budget 2024 proposed to amend Section 193 of the Income Tax Act, 1961 by levying TDS on Floating Rate Savings Bond, 2020 (Taxable) or any other security of the Central Government or State Government as the Central Government shall notify,” says Atul Puri, Managing Partner and Co-Founder at SW India.
How to reduce or eliminate deduction of TDS from government bonds
According to Puri, if your income tax assessing officer (AO) grants you a lower or nil TDS certificate, then you will not be required to pay 10% TDS on the interest earned on government bonds.
“As per section 197 of the Act, in a case where TDS is required to be deducted under section 193 of the Act and assessing officer is satisfied that the total income of the recipient justifies deduction of income-tax at a lower rate or no deduction of income-tax, as the case may be, the AO shall, on an application made by the Assessee, give him/her such certificate as may be appropriate for lower or Nil deduction of tax. Hence, the option of lower or Nil deduction certificate can be availed by the investor in case of such investments,” says Puri from SW India.
The AO will not automatically grant this lower or nil TDS certificate, if you think you should get a lower or nil TDS, then you need to present your case before him/her. If only the AO is satisfied with your case, then the certificate is given. The AO will evaluate the estimated tax liability on the current financial year’s projected income and the tax liabilities from the previous financial years.
“The Assessing Officer will take into consideration any advance tax payments, TDS, and tax collected at source (TCS) for the current financial year up to the application date. If the AO determines that the estimated tax liability is NIL or negligible and the application of the standard TDS/ TCS rates is unnecessary, a certificate specific to the deductor and the service/ section will be issued under section 197 for NIL or lower TDS. The validity of the certificate will be from the date of issuance until the end of the financial year, unless the AO revokes it before its expiration,” says Professor Arunava Bandyopadhyay, Assistant Professor – Finance, International Management Institute Kolkata (IMI Kolkata).
An alternative way to eliminate TDS being deducted from government bonds is by submitting Form 15 G/H if your income is below the basic exemption limit — which is Rs 2.5 lakh under the old tax regime and Rs 3 lakh under the new tax regime for a person below the age of 60
“As per Section 197A(1A) and 197A(1C), no deduction of tax shall be made under section 193 in case of a person (not being a company or a firm), who furnishes Form 15G/H and declare that his/her total income does not exceed basic exemption limit. Hence, investors can submit Form 15G/H to prevent deduction of TDS,” says Puri.
How to get a lower or nil TDS certificate
According to Bandyopadhyay from IMI Kolkata, Section 197 facilitates taxpayers to apply for a lower TDS certificate or an exemption from TDS. Individual taxpayers without any business income can initiate an online application on the TRACES portal.
“The applicant must complete and submit the prescribed form number 13 along with all supporting documents, which includes income computation for the current financial year, tax returns for previous financial years, and other relevant evidence as required on a case-to-case basis. To ensure faster processing, it is advisable to complete the form with accurate details. If the Assessing Officer is satisfied with the application and the documents provided, a certificate for lower deduction or non-deduction of TDS will be issued,” says Bandyopadhyay.
Despite being NRI you will be taxed as Indian resident if your income in India is above this.
What will be the impact of TDS being levied on government bonds
According to Kuppa, the government’s decision to levy TDS on government bonds means that the interest you receive (on such notified government bonds) will be subject to TDS deduction.
Kuppa explains with an example. Consider a central government bond, such as the 07.10 GS 2034. If you purchase 1,000 units (post October 1, 2024) with a face value of Rs 100 (total investable amount of Rs 1 lakh), and the interest is paid semi-annually, you will receive a coupon interest payment of Rs 3,550. With the new 10% TDS being levied on such interest, Rs 355 will be deducted, resulting in a payment of Rs 3,195 as interest.
In order to receive the amount of TDS deducted, you (deductee) need to file the income tax return (ITR) for the relevant financial year in which the TDS was deducted. “An investor can claim the benefit of TDS so deducted in their income tax return. The amount of interest paid / credited, and TDS deducted will be reflected both in AIS and Form 26AS of the deductee. It is very clear that TDS is required to be deducted only on the income earned as interest and not on the principal value,” says Puri.
According to chartered accountant Manoj Dembla, who has over 30 years of experience in finance, accounting, taxation, and insolvency, “Income from Government Bonds, i.e. interest on Securities, is subject to TDS @10% and taxed at normal rates, but if you buy and sell it resulting in capital gains, then if the same is held and sold in less than a year, it will be taxed as Short Term Capital Gains (STCG) and if it’s sold after holding it for more than a year, it will be taxed as Long Term Capital Gains (LTCG) @12.5%.”
Which investors may be more impacted due to levy of TDS on government bonds
According to Kuppa, if you rely on government bonds for a consistent interest income as an investor, you may be particularly affected by the government’s decision.
“This change may impact investors who depend on the regular interest income from these securities, potentially disrupting their cash flow. However, it is likely to be a short-term reaction, with investors eventually adapting their investment strategies accordingly. There is a remote possibility that investors can move to Mutual funds to invest in Gilt funds which has a government securities as its underlying,” says Kuppa.
Experts suggest that the government’s decision to impose TDS on government bonds aims to ensure that this type of investment is on par with other bonds.
“TDS is levied on interest on Corporate Bonds at 10%. TDS on corporate bonds was levied in 2023, while Government securities and State government bonds were kept out of its ambit. The government has made this move with the expectation of bringing all instruments at par from a taxation point of view,” says Kuppa.
Does it matter where you buy government bonds from- stock market or RBI?
As per Puri, section 193 states that the person responsible for paying a resident any income by way of interest on securities will, at the time of crediting such income to the account of the payee or at the time of payment, whichever is earlier, deduct income-tax.
“Accordingly, there is no difference in withholding tax provisions, whether we buy from RBI Retail Direct or from the stock market,” says Puri. This means that the TDS mechanism will remain the same regardless of how you buy the bond.
