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QUESTIONS & ANSWERS

Bonds are securities governed by Sec. 193 for purposes of tax deduction at source. No tax was required to be deducted on any interest payable on any security of the Central or State government under proviso (iv) to Sec. 193.

However, a new proviso was inserted to Sec. 193 with effect from June 1, 2007 requiring tax deduction at source. It reads as under:

“Provided that nothing contained in this clause shall apply to the interest exceeding rupees ten thousand payable on 8 per cent Savings (Taxable) Bonds, 2003 during the financial year”.

As for the rate of tax, Sec. 193 provides that tax deduction will be at the rate in force. The amendment with effect from June 1, 2007 withdrawing exemption from TDS for interest on 8 per cent Savings (Taxable) Bonds, 2003 falls under interest on securities of Central or State governments showing that it is covered by the entry under sub-clause (v) and at any rate under clause (i) and not under clause (vi) of (1)(a) of Part II of the Finance Act, 2007, so that tax deduction is at 10 per cent for these bonds. The residuary clause fixing 20 per cent rate in clause (1)(a)(vi) is meant for unlisted items and not where it is specifically fixed and can therefore have no application for the bonds under consideration. The reader is, therefore, right. The note as well as practice of deduction at 20 per cent arises out of misunderstanding of the law that these bonds are not securities.

The error, it is hoped, would be taken notice by the authorities both of the Reserve Bank of India as well as the Central Board of Direct Taxes for modification of the note/ instruction to accord with law.

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