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Tax deduction from income of the Trust

HYDERABAD: I am a senior citizen (72 years). I have a mentally disabled son, who has been admitted into a Home. I made a Trust to look after him now and after my demise with the State Bank of India, Chennai Main Branch, Securiti

es and Services, Chennai, with a corpus of Rs. 6 lakh. At present, the bank pays 8 per cent interest for the deposit. Since SBI has announced 9 per cent interest and 9.25 per cent for senior citizens, I am requesting them to pre-close the deposit and offer the enhanced interest to the deposit. The bank replied that the above deposit attracts 20 per cent income-tax, if the interest exceeds Rs. 50,000 annually. In this case, the beneficiary is my disabled son and the money belongs to him as per the Trust. My presumption is that he is eligible for full tax exemption up to Rs. 1 lakh income. Am I not right? Why the bank should recover 20 per cent income-tax from a mentally disabled?

It is understood that the reader is the settlor and the trustee of the trust for the benefit of his son. If the son is a minor, the income would ordinarily be clubbed in the hands of either parent with higher income. But in view of exception in Sec. 64(1A) in respect of income of a minor child having disability listed in Sec. 80U, minor child’s income need not be clubbed, as he is entitled to independent assessment, with the father acting as a guardian or trustee. The child is entitled to a separate exemption limit of Rs. 1 lakh besides deduction of Rs. 50,000 with enhanced deduction of Rs. 75,000, if his disability is a “severe” one within the meaning of Sec. 56(4) of Person with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 or Sec. 2(j) of National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation or Multiple Disabilities Act, 1999.

The reader as guardian or trustee can file Form 15G in respect of his son’s income, if the income falls below taxable limit. The bank apparently agrees that Form 15G is exigible on the child’s income filed by the father or trustee on behalf of the child, but subject to the limit of Rs. 50,000. Apparently, the advice given by the bank is with reference to the provision under Sec. 197A(1B), which bars the facility of filing Form 15G for persons’ with tax deductible items exceeding maximum amount not chargeable to income-tax, even if he has no tax liability. At present, the limit is Rs. 1 lakh, which was raised from Rs. 50,000 from assessment year 2006-07, so that reference to Rs. 50,000, if made after April 1, 2005 would be incorrect. It should be Rs. 1 lakh. This may be explained to the bank. If the limit that is applicable for the year is exceeded, tax deduction cannot be avoided, since Form 15G cannot be entertained. Only course is to file return in due course and claim refund. For senior citizens, the limit has no application, so that, if their total income falls below the limit, they can file Form 15H, even if tax deductible amount exceeds the limit of Rs. 1 lakh.

S. RAJARATNAM

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