Sucheta Dalal :Now even your fixed deposit principal may be at risk
Sucheta Dalal

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Now, even your fixed deposit principal may be at risk  

April 1, 2010

Would you think twice before investing in a fixed deposit? The obvious answer would be a resounding ‘no’. But what if a bank is nibbling away at your principal in the name of deducting tax at source on your interest earnings?

It is unthinkable, right? Not quite. It appears that banks have found a way to tamper with the principal of your fixed deposits too. Here is the case of a senior colleague at Moneylife.

One fine day, she suddenly discovered that her fixed deposit of Rs50,000 in HDFC Bank was appearing in the statement as Rs49,934. Assuming it was a mistake, she wrote to the bank and was in for a shock.

She was told that while the bank has a policy of not recovering tax until the interest accrued crosses the taxable threshold of Rs10,000, in her case, this threshold was crossed when the interest on the FD of Rs1,028 was credited to her account. Her total interest was Rs10,607 which meant that the bank had to deduct tax at 10.2% on Rs10,607 which came to Rs1,081. The figure fell short after adjusting the entire interest of Rs1,028. So the bank coolly decided to dip into her principal, knowing fully well that it has no right to do so. Simply put, this means that the bank is eating into the savings and eating up the principal under the garb of collecting advance tax.

This was done despite the fact that she has a savings account with the bank. Neither was her savings account used to cover the amount nor was she asked to deposit the amount. The bank made no attempts whatsoever to inform her of their intentions to adjust her principal.

What is even more alarming is that this lady is a ‘privileged customer’ of HDFC Bank. If priority customers are at the receiving end of such shocking practices, one can only imagine the plight of ordinary customers.

Banks can only deduct tax on the interest amount and have no business deducting from the principal. When asked why the bank lopped off the principal, a bank executive gave this breezy reply: "There is an old CBDT (Central Board of Direct Taxes) clarification on this issue, but irrespective of the clarification, this (recovery from principal) is the option which has the least issues. Hence (the) Bank has, as a policy, decided on recovering from principal if the interest is not sufficient.” 

We have learnt to our utter horror that, indeed, under a CBDT circular, banks have been asked to deduct tax in advance per quarter on accrual basis. This is outrageous, considering that most of these deposits are fully tax-paid savings.

This issue has been raised before the Reserve Bank of India, which has sought comments from HDFC Bank.

Fixed deposits are the only investment avenue people don’t think twice about before investing. They are considered to be the safest form of investment that at least ensures that your tax-paid principal amount, usually your hard-earned savings or retirement kitty, is safe. That may no longer hold true.

Another senior citizen had a similar complaint about his cumulative FD. In his case, Bank of India deducted TDS amounting to Rs16,000 from the maturity value of his deposit. He was also not sent a TDS certificate. “First, they don’t inform people beforehand and start deducting TDS from day one. Most nationalised banks and even some private banks don’t send TDS certificate home. For senior citizens, this is a big hassle. This is a huge lacuna which needs to be addressed,” he said.

Commenting on this issue, Sheilu Sreenivasan, founder, Dignity Foundation said, “A fixed deposit is the most popular vehicle of investment among senior citizens. They trust FDs like no other instrument. This is absolute loot.”

VG Patel, trustee, Consumer Education and Research Centre (CERC) said, “No one should touch my deposit without prior intimation and authorisation. It is my savings and I put it in a bank for safe keeping. We take one step forward and two backwards in the process of freeing us from the clutches of ancient and arrogant rules, procedures and the civil servants.” — Moneylife Digital Team

-- Sucheta Dalal