Income-tax exemptions:Interest on Post Office Savings Bank Account (POSB) -recent amendment to restrict exemption is not much purposeful – will increase administrative burden on assessee and AO without much gain to revenue if at all.

Relevant links and references:

NOTIFICATION NO. 32/2011  DATED 3-6-2011

notification number G.S.R. 607(E), dated the 9th June, 1989

POSB interest is exempt:

At present interest earned on Post Office Saving Bank account is exempt u/s 10(15)vide  notification number G.S.R. 607(E), dated the 9th June, 1989.

Limits of balance in POSB a/c:

As per POSB Rules the minimum  balance required in POSB a/c is  Rs 50  and  maximum  permitted balance is  Rs one lakh for  a POSB a/c in single name and  Rs 2 lakh in case of a joint account. In case of excess balance above these limits, any interest is not allowed.

Restriction on exemption:

The CBDT has issued a recent notification to amend the earlier notification and to provide that interest exemption shall be limited to Rs.3500/- in a year in case of a single POSB A/c and up t oRs.7000/- in case of a joint account.

The notification is reproduced below with highlights and catch words added by author for easy analysis and understanding:

Notification - Income Tax - IT

NOTIFICATION NO. 32/2011DATED 3-6-2011

In exercise of the powers conferred by sub-clause (i) of clause (15) of section 10 of the Income-tax Act, 1961 (43 of 1961) the Central Government hereby makes the following amendment to the notification of the Government of India in the Ministry of Finance, Department of Revenue, Central Board of Direct Taxes, published in the Gazette of India, Extraordinary, Part II, section 3, sub-section (i), vide number G.S.R. 607(E), dated the 9th June, 1989, namely :—

In the said notification, in the Table, for serial number 9 and the entries relating thereto, the following serial number and entries shall be substituted, namely :—

2. This notification shall come into force from the date of its publication in the Official Gazette.

[F.No.173/13/2011-ITA.I] /S.O.1296(E)

Thus apparently the government has decided to levy tax on the interest obtained on Post Office savings schemes from the current financial year, if the interest earned on particular POSB a/c exceed prescribed limit. 

Effective date:

However, since the amendment is made after commencement of the previous year 2011-12   (01.04.2011- 31.03.2012) relevant to the  assessment year 2012-13, therefore, the amendment will be effective only from  PY 2012-13 relevant to the  assessment year 2013-14. This is because an amendment that affect rights and tax liability of the assessee can be effective only for a previous year which has not yet begun.

Therefore,  the amendment will not be effective for the current / running accounting year/ previous year as expressed in certain quarters and on some websites.

To avoid litigation CBDT is requested to clarify this position.

Exemption is for each account:

From reading of the new clause in the notification it is clear that the exemption allowed is in relation to each POSB A/c. This is not with reference to assessee. Suppose an assessee has four POSB a/c one  in single name of  A and  three in joint names of A + W  , A+ S and A + D.

The limit is applicable for each account separately. Therefore in the above case A will get exemption of Rs. 3500/- for the singly held a/c and Rs.7000 x 3 = 21000/- in respect of three joint accounts.

  An unnecessary amendment:

POSB accounts are generally maintained for ease in banking and saving activity of not very high income groups.  POSB a/c is maintained along with other investments like Recurring Deposits, Fixed deposits and investments through Post Offices. There will not be many cases of POSB a/c in which interest in excess of presently prescribed  exemption limits will be credited, if at all such accounts are found.

As per POSB Rules in a single POSB a/c balance can be maintained  only up to Rs. one lakh and in a joint account up to Rs two lakh. If the balance exceed such limits, then interest is not allowed. In other words interest is allowed only up to the maximum limit of balance allowed.

The rate of interest is 3.5%. Therefore, in any case maximum interest  credited will not exceeding the limit of exemption of Rs.3500/- and Rs.7000/- in case of single account and joint account respectively.

Let us assume that interest on POSB a/c will be increased. The increased rate is not likely to exceed 4%. Even @ 4%  maximum interest allowed will be Rs.4000/- and Rs.8000/- in a single and joint POSB a/c respectively.

Just to bring into tax net Rs.500/- and Rs,1000/- in cases of single and joint accounts respectively, the administrative burden being imposed on assessee and the Assessing Officers appears not to be result oriented.  

Therefore, it appears that the notification is of not much use and help to revenue. It will just increase work of verification by the assessee and the AO to check that exemption is claimed properly and in most of cases it will be found that there is no taxable interest in POSB accounts maintained by assesses.  

Suggestions and request to the CBDT:

It is suggested and requested to the CBDT members that ABC analysis approach should be applied in administration of tax provisions. It is not worthwhile to make amendments which has no potential to increase tax revenue substantially. The cost of verification and administration for carrying out such amendments should be kept in the mind while withdrawing or restricting certain exemptions which are basically meant for small tax payers. In view of that thinking the author suggests that the  present amendment should be withdrawn and the entire amount on interest in POSB accounts should be allowed to be exempted as in past and at present.