In addition to fixed deposits, now TDS will also apply to recurring deposits. But honest taxpayers have nothing to worry about.

There is some bad news for investors who thought their recurring deposits (RDs) will not be subjected to tax deduction at source (TDS). The Budget has made RDs liable to TDS if the income in a financial year exceeds `10,000.

Till now, only income from fixed de posits was subjected to TDS. There is also a significant change in the rules relating to interest in come from FDs. Till now, the TDS kicked in only if the income from FDs made in a particular bank branch exceeded the threshold of `10,000 in a financial year. It was common for investors to open FDs at multiple branches of their bank to avoid TDS. The budget has proposed that TDS should be levied if the combined interest income from FDs in all branches of a bank exceeds `10,000 in a year.

The new rules come into effect from 1 June but banks are already witnessing a rush of investors prematurely closing their RDs and FDs. The new rules on TDS will help nail tax evasion and improve tax collections

However, taxation experts say the new rules should not be a concern for honest taxpayers. They already pay tax on their RDs and FDs. Instead of paying the tax themselves, it will get deducted as TDS. If they fall in the higher tax bracket, they will pay the balance tax.

The third major change in TDS rules is that co-operative bank deposits are no longer exempt. The budget has proposed that TDS will also be applicable to deposits with co-operative banks. This was more or less expected. Last year, the Karnataka Income Tax Tribunal had ruled that if the interest exceeded `10,000 in a year, it must be subjected to TDS.

Following this, several cooperative banks had received notices from the Income Tax Department asking them to deduct tax for the year 2013-14. Now the Budget has put a stamp of certainty on the rule. This will bring a lot more revenue to the government through TDS and increase the tax base because depositors would need to adjust or claim refund at the time of filing their income tax returns.

Only an interim tax

Investors should note that TDS is only an interim tax. It is 10% of the income. If the investor has not provided his PAN, it is higher at 20%. But the interest earned on RDs and FDs is fully taxable. If the income is below `10,000 and TDS has not been deducted, you have to add the interest to your total taxable income and accordingly pay tax.

The actual tax will depend on the income of the individual. Even if TDS has been deducted, it does not mean that your tax liability is taken care of. If you are in the 20-30% tax bracket, you are required to pay more tax on the income. If the investor has an income of over `10 lakh in a year, the interest from the RD or FD will be taxed at 30%. The balance 20% will have to be paid as self-assessment tax. If he earns less than `2.5 lakh a year, the TDS will be refunded after he files his tax return.