By Sanket Dhanorkar,
If you have not been reporting the interest
income from your fixed deposits while filing tax returns, there is
reason to worry.
All interest income from bank FDs (including
the 5-year tax saving FD), bank recurring deposits, company FDs,
non-convertible debentures (NCD) and National Savings Certificate (NSC), among
others, is taxable. Even when your bank cuts TDS at 10% on your FD, you are
liable to pay the balance tax if you fall under a higher income slab. However,
there is flexibility on how you report this income.
You are allowed to report interest income
either on cash or accrual basis—you can account for the income either when you
receive it or when interest is due. For instance, in the cash method, if you
have invested in a three-year bank FD where the interest payout is cumulative, you
can safely put off reporting the interest income for the first two years. If
the interest payout is non-cumulative, you have to report the income that year
itself. Under the accrual or mercantile method, the tax on the interest income
has to be paid even if the income has not been received. Even when the interest
payout is cumulative, the investor has to report the income for each year.
Which method should you follow?
Which method should you follow?
By allowing you to defer tax liability until
later, the cash method takes away the immediate burden for those facing cash
flow problems.
However, there are issues. On products like
bank FDs where the bank cuts TDS on interest received, if it is in excess of Rs
10,000 every year, the tax credit for the same will be available only in the
year in which the income is offered to tax. "Since the issuer would have
already deducted the tax in earlier years, you would have to reconcile the same
in the final year," says Kuldip Kumar, ED, Tax & Regulatory Services,
PwC.
If you follow the cash method, there is
a risk that your income may come under a higher tax slab
in some years, as a result you will end up shelling more tax on the interest
income than earlier. Even under the same slab, deferring the tax would result
in a high sudden outgo in the year of receipt. That is why, experts advise
investors to stick with the accrual method. Even though you will be hit with
tax on income which you have not received, the tax payout will be spread across
many years. "It is better for individual taxpayers to follow accrual
method of accounting as it brings clarity to your financials and you can carry
out your tax-planning on a yearly basis," says Sudhir
Kaushik, Cofounder and CEO, Taxspanner.
Bear in mind that where TDS is not cut, the
onus will be on you to compute the total interest income for the year. If you
remain in the same tax slab for the entire tenure of the investment, deferring
the tax liability until maturity makes more sense. Although the total tax
liability under both methods would remain the same, paying tax on yearly
accrual basis could mean an
opportunity loss on the money paid as tax over the years. The return you would
make from investing this money until maturity of the instrument, and then
paying tax will yield a better result.
While you are free to choose what method of
accounting to follow, you cannot switch at any time. If you are reporting
interest income on your bank FD on cash basis today, you cannot start reporting
it on accrual basis from next year without justification. While a one-time
change in method of accounting is typically allowed, frequent changes is
frowned upon by the taxman.
Source:-The Economic Times
