Audit Observation: Short Deduction of ₹29.70 Lakh TDS Due to Non-Application of Section 206AA on NSS Account Closures in Karnataka Circle

Short Deduction of Tax Deducted at Source (TDS) of ₹29.70 Lakh on Closure of National Savings Scheme Accounts

Short Deduction of Tax Deducted at Source (TDS) of ₹29.70 Lakh on Closure of National Savings Scheme Accounts

In case of non-availability of PAN in National Savings Scheme (NSS) accounts, TDS had been deducted by the postal authorities at the rate of 10% of the amount payable. However, Section 206AA of the Income Tax Act, 1961 stipulates deduction of TDS at 20% where PAN is not furnished. This resulted in short deduction of TDS amounting to ₹29,70,868.04 across seven Head Post Offices (HPOs) in Karnataka Circle.

As per Section 194EE of the Income Tax Act, 1961, relating to payments in respect of deposits under the National Savings Scheme, the person responsible for making such payments shall deduct income tax at the rate of 10%. However, Section 206AA mandates that where the recipient fails to furnish a valid PAN, tax shall be deducted at the rate of 20%. Thus, PAN is compulsory wherever TDS is applicable, and in the absence of PAN, TDS must be deducted at the higher rate.

Further, SB Order No. 13/2019 communicated the provisions of the General Savings Promotion Rules (GSPR), 2018, which required existing depositors who had not submitted PAN at the time of opening the account to furnish the same within six months. Failure to do so would render the account inoperative until PAN was submitted.

During scrutiny of Finacle system-generated Customer Identification Files (CIF), ledger copies of NSS87 accounts, and TDS reports of seven HPOs in Karnataka Circle—namely Bengaluru GPO, RT Nagar HO, Rajajinagar HO, HAL II Stage HO, Jalahalli HO, Basavanagudi HO, and Jayanagar HO—for the period FY 2019-20 to FY 2024-25, it was observed that PAN details of NSS87 account holders were not available in the CIF records as required under Section 206AA of the Income Tax Act, 1961.

Despite the absence of PAN, the HPOs processed closure of NSS87 accounts and paid ₹2,81,13,116.40 after deducting TDS at 10%, amounting to ₹26,51,755.24. As per Section 206AA, TDS should have been deducted at 20%, amounting to ₹56,22,623.28. Consequently, there was a short deduction of TDS of ₹29,70,868.04.

When the matter was pointed out, all seven HPOs replied that verification of the closed account vouchers would be carried out and a final report would be submitted. They further stated that TDS was being deducted automatically at 10% through Finacle, and that the issue would be raised with CEPT.

However, the fact remains that withdrawals from NSS accounts were permitted without ensuring the availability of PAN of the account holders. The authorities failed to exercise adequate controls to identify and rectify the irregularity, resulting in non-compliance with the Department of Posts’ instructions and the provisions of Section 206AA of the Income Tax Act, 1961. Consequently, TDS was deducted at a lower rate than prescribed, leading to a short deduction of ₹29.70 lakh on closure of National Savings Scheme accounts across seven Head Post Offices in Karnataka Circle.

DEPUTY DIRECTOR