Section 194EE of the Income Tax Act: TDS on National Savings Scheme (NSS) – The Latest Position
Section 194EE of the Income Tax Act, 1961, historically dealt with Tax Deducted at Source (TDS) on payments made from deposits under the National Savings Scheme (NSS). While the NSS was discontinued for new subscriptions in 2004, existing accounts continued to operate and were subject to this provision upon withdrawal. However, recent amendments have significantly altered the applicability of TDS on NSS withdrawals, providing considerable relief to depositors.
Key Update: Tax Exemption and TDS Non-Applicability on NSS Withdrawals
Crucial Update: As per the Finance Act 2025, a significant amendment has been made to Section 80CCA(2) of the Income Tax Act. This amendment clarifies that **any sum received by an individual from their National Savings Scheme (NSS) account, whether principal or interest, on or after August 29, 2024, is fully exempt from tax.**
**Consequence for TDS:** Since such withdrawals are now fully exempt from tax in the hands of the individual, **no TDS is required to be deducted under Section 194EE** for payments made from NSS accounts to individuals on or after August 29, 2024. The Central Board of Direct Taxes (CBDT) has also issued notifications clarifying this non-applicability of TDS.
Historical Context: What Section 194EE Used to Cover
Prior to the August 29, 2024, amendment, Section 194EE mandated TDS on payments from NSS accounts. Here’s a brief overview of how it previously functioned:
- Payment Source: Applied to payments from deposits under the National Savings Scheme.
- Recipient: The payment was made to the depositor (assessee).
- TDS Rate: The rate of TDS was a flat **10%**.
- Higher Rate for Non-PAN: If the depositor does not furnish a valid Permanent Account Number (PAN), TDS was deducted at a higher rate of **20%**, as per Section 206AA.
- Threshold Limit: TDS was applicable only if the aggregate payment in a financial year **exceeded ₹2,500**.
- Exemptions (Previously):
- Payment below the ₹2,500 threshold.
- Payment to legal heirs on the death of the depositor.
- Submission of Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) if the estimated total income for the financial year was below the taxable limit.
- Certificate for Lower/Nil Deduction (Section 197) from the Assessing Officer (AO).
Why the Change? Cessation of Interest on NSS Accounts
The decision to exempt NSS withdrawals from tax and, consequently, from TDS, is primarily driven by the government's move to cease interest accrual on existing NSS balances. From **October 1, 2024**, balances in NSS accounts will no longer earn any interest. This change aims to simplify the treatment of these legacy accounts and provide a clear path for depositors to withdraw their funds without tax implications.
Many elderly and extremely elderly individuals hold very old NSS accounts. Since interest on these accounts is no longer due, the exemption allows them to withdraw their funds without any tax liability or the hassle of TDS procedures.
Compliance for Past Periods and Current Scenario
While TDS is no longer required for NSS withdrawals on or after August 29, 2024, it's important to remember that:
- For withdrawals made **before August 29, 2024**, the previous provisions of Section 194EE (including TDS deduction, deposit, and return filing) were applicable. Deductors must ensure that all compliance for such past transactions is complete.
- **No new TDS requirements** arise for NSS withdrawals for individuals on or after the specified date.
- Depositors who had tax deducted on withdrawals made *before* August 29, 2024, can still claim credit for that TDS when filing their Income Tax Return (ITR) for the relevant assessment year, provided the income was taxable at that time.
Conclusion
The recent changes to the Income Tax Act, particularly concerning Section 80CCA(2) and its impact on NSS withdrawals, mark a significant simplification. Section 194EE, while still part of the Act, will effectively have no practical application for individual NSS withdrawals made on or after August 29, 2024, due to the complete tax exemption granted to such income. This provides much-needed clarity and relief for those who still hold funds in these older savings instruments, allowing them to access their savings without the burden of TDS.