The Senior Citizen Saving Scheme (SCSS) with its 9% coupon is extremely popular. However, the interest is fully taxable.

And though the scheme had been launched in August 2004, it was only in March 2006 that the Central Bureau of Direct Taxes (CBDT) issued a clarification stating that the interest is subject to TDS (tax deduction at source) (Letter No. 28 /2004-NS-II dated 28.3.06).

This is not the main problem. What has opened a Pandora's box is another clarification issued by the CBDT on June 6 that seeks to hold the bank or the post office that has not deducted tax in the past as an assessee in default.

But first the background.

The rate for TDS for a financial year will be 10.2% for a Resident and 20.4% for Non-Resident Indians.

• TDS has to be applied if the interest paid or payable exceeds Rs 5,000 during the financial year. TDS is applicable on the entire amount payable if it exceeds Rs 5,000. For example, if the interest paid/payable in a financial year is Rs 4,000, no TDS shall be made. However, if the amount is Rs 25,000, TDS shall be made at the prescribed rate on the entire amount of Rs 25,000 and not Rs 20,000.
• TDS shall be applied even from any interest paid/payable to the legal heir of the account holder.
• It has further been clarified that the facility of furnishing Form No 15H (to request non-deduction of TDS) will be available only to an investor who is 65 years or more. It may be noted that as per the Income Tax Act, a person who has attained 65 years or more at any time during the previous year only is treated as a senior citizen.

Now in response to the specific query as to whether such TDS would be applicable retrospectively, this is how the CBDT clarification reads:

"The question is not clear. However, it may be stated that TDS would be applicable from the very first day the SCSS scheme was made operational, regardless of the fact the Central government or the RBI (Reserve Bank of India [Get Quote]) or any authority issued any circular/notifications/clarifications at a later stage."

"In case where the bank (or the Post Office) does not deduct tax, which was deductible as per the provisions of the IT Act, the bank/post office may be treated as an assessee in default for the amount not deducted and the same may be recovered from the bank/post office along with interest, apart from other consequences, as per the provisions of section 201 of IT Act."

In the light of the above, the question is what action will the bank or post office take in respect of their SCSS investors?

Issues that arise:

1. If it was applicable right from the date of launch of SCSS on August 2, 2004, why was the TDS not applied for in FY 04-05 and FY 05-06? Was the ministry of finance not aware of the fact that the TDS was not applied by all the accounts offices because of executive instructions not to do so? Was CBDT sleeping on this issue for as many as two financial years?

2. The Income Tax Act imposes heavy penalties on any person who fails to deduct tax at source, and this may include rigorous imprisonment. Will such punishments be imposed on our banks and post offices?

3. If the banks or post offices do indeed impose TDS for the past years, it would lead to the anomalous situation where a senior citizen would end up paying tax twice. Once in the normal course while filing the tax return for the relevant year (that too if he is taxable in the first place), and the second time due to the late tax deduction, if done.

This would lead to many complications (that we need not go into in this column) and I don't think this is a solution at all.

4. As already mentioned, only those investors who qualify as senior citizens as per the Income Tax Act (65 years or more) may file Form 15H. However, the senior citizen as defined by SCSS is different from the one as defined by the ITA.

SCSS allows anyone who is 60 years or above to invest. The age limit is 55 years for someone who has retired under VRS (voluntary retirement scheme) or otherwise. And retired personnel of defense services (excluding civilian defense employees) are eligible irrespective of the age.

All such persons who are under 65 years have no right to file Form 15H. They can file Form 15G, but the CBDT clarification does not envisage Form 15G. Is this an oversight? If it is, another clarification amending the earlier one will be needed.

Otherwise, the only recourse to such investors would be to file their tax return and claim refund. Is this really the intention of the legislation?

5. Finally, as in the case of SCSS, the LIC's [Get Quote] scheme, 'Varishtha Bima Yojana,' which had a similar structure as that of SCSS, did not refer to TDS at its launch but subsequently the same CBDT issued a circular exempting it from TDS.

Could not the same action be taken in the case of SCSS? After all, investors in SCSS are seniors largely with limited income. If they are liable to tax, they would pay the tax in the normal course by filing their tax return. What was the need to complicate the entire issue by imposing TDS, then selectively offering Form 15G and then clarifying that this was to be done from launch of the scheme?

This has given rise to more uncomfortable questions rather than answers. The finance ministry needs to settle this matter fast, else our senior citizens will be harassed.

My sincere thanks to Sharad Hatekar from Nagpur for providing inputs and actively following up with the National Savings Organisation on this issue.

The writer is Director of A N Shanbhag NR Group, a Mumbai based tax and investment advisory firm. He may be reached at sandeep.shanbhag@gmail.com