The Hindu : NSC: treatment of its income

Online edition of India's National Newspaper
Monday, Jul 07, 2003

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NSC: treatment of its income

QUESTION: Most of our employees are holders of National Savings Certificates, the contribution to which qualify for relief under Section 88. Such relief is considered for purposes of tax deduction at source.

As regards the notional income for each year from such certificates, this is also being treated as reinvested in such certificates, so that we add the annual accretion as re-investments in National Savings Certificates and claim rebate on such amount also. This is also reckoned for tax deduction purposes on the basis of statement given by us. The company's auditor now insists that the income from National Savings Certificate should be included as income liable for tax deduction at source, if we want the rebate to be considered for purposes of tax deduction at source. What is the correct position of law?

ANSWER: Tax rebate under Sec. 88 is not now available at the same rate for all employees. Those with gross total income exceeding Rs. 5 lakhs are not eligible for tax rebate at all, while those between Rs. 1.50 lakhs and Rs. 5 lakhs will get 15 percent rebate and others get 20 per cent. For those with salary income, if such salary does not exceed Rs. 1 lakh and at the same time it also is not less than 90 per cent of gross total income, rebate is at 30 per cent.

Interest on National Savings Certificates in the context of Sec. 80C accrues from year to year but is accumulated to be paid on the date of redemption. Rebate is conceded on an annual accretion even in annual circulars issued for tax deduction at source from salaries, the last one being Circular No. 13 of 2002 dated December 23, 2002 which, in Paragraph 5.4(6)(b), reads as under:

".........Interest on NSC (VII Issue) and NSC (VIII Issue) which is deemed investment also qualifies for the rebate".

Auditor's point that such annual accretion is taxable as income is true. But it is not income from salary, since such interest is taxable as income from other sources and is eligible for deduction under Sec. 80L(1)(ia) of the Act up to a maximum of Rs. 12,000 per annum along with similar other deductions. Since tax deduction at source is limited to salaries paid by employer, taxability of the income other than salaries is not strictly within the purview of the disbursing officer. Employer takes into account the amount of accretion for rebate purposes on a statement from the employee indicating the annual contributions eligible for Sec. 88. There is no obligation on the part of the employee to include any income other than salary, unless the assessee chooses to have the tax deducted on the basis of his entire income by filing Form 12C, subject to the condition that he cannot claim losses in such Form except for loss from property. Where Form 12C is filed, the income from National Savings Certificates and other income would have been included with claim under Sec. 80L also being recognised up to permissible limit for this purpose.

Though the disbursing officer is obliged to take into consideration the tax rebate under rebatable savings reported by the employees, he is not concerned with any income other than salaries, unless Form 12C is filed by the employees. Hence, the insistence for inclusion of annual accretion to National Savings Certificates as taxable income as a condition for taking into consideration the tax rebate on such accretion is not correct, apart from the fact that such income may even otherwise be eligible for deduction under Sec. 80L.

S. Rajaratnam

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NSC: treatment of its income