Sucheta Dalal :Lopping off Tax from Principal!
Sucheta Dalal

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Lopping off Tax from Principal!  

April 9, 2010

Until now, we told investors that bank fixed deposits, although taxable, would at least ensure that your tax-paid principal amount, usually your hard-earned savings or retirement kitty, is safe. Well, not anymore. Beware. A bank could be nibbling away at your principal in the name of deducting tax at source on your earnings! 

Here is what happened to a senior colleague of ours. 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 the 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 FD interest 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 dipped into her principal, knowing full well that it has no right to do so. Our colleague has a savings account with the Bank which was not used, nor was she asked to deposit the additional sum. When asked why, a Bank executive had 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.” Surely a bank understands the cost of money lost by nibbling into the principal? The government taxes income earned on fixed deposits, not the deposit itself which is from post-tax savings. Can a bank lop off the principal to justify its bizarre policy? We have asked the Reserve Bank of India for an answer. — Sucheta Dalal

-- Sucheta Dalal