Why Interest From Kisan Viaks Patra Must Be Shown Every Year!

Can paying tax on interest accrued on investments in KVP / NSC / GOI bonds be deferred for a year ie based on receipts? Melwyn D'souza

Interest income is generally assessed under the head "Income from other sources".There are two general methods of accounting of income or expense. The receipt basis (Cash accounting ) or accrual basis (mercantile system).Section 145 of the I T Act prescribes "method of accounting" to be followed for computation of income . The said provision states as under

145.

(1) Income chargeable under the head Profits and gains of business or profession or Income from other sources shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

As one can see from the aforesaid provision that in case of business or income from other sources , an assesse has the option of maintaining accounts either on cash(receipt) basis or accrual basis. The interest on National Savings Certificate or GOI Bonds or other savings instruments falls under the category of the income from other sources. So , one can show the income from these saving instrument either on receipt basis or accrual basis. However, the interest on Kisan Vikas Patra has to be necessarily shown on accrual basis . This is an exception. The CBDT circular No. 687, dated 19-8-1994. which is given below, clarifies the exceptional provision regarding interest from Kisan Vikas Patra

Kisan Vikas Patras were introduced on 1st April, 1988. The Department of Economic Affairs, Ministry of Finance, in its notifications dated 23-3-1988, 16-12-1991, 24-4-1992 and 2-9-1993 had specified the amount payable on these after 2½ years and up to the date of maturity. However, interest and maturity amount during 2½ years had not been provided in these notifications.

2. As interest on these Patras has to be assessed to income-tax on accrual basis, the amount of interest accrued on these Patras during initial 2½ years has also been determined in consultation with the Department of Economic Affairs. The amount of interest accrued on investment in Kisan Vikas Patras by an assessee is to be calculated on the basis of the following table received from the Department of Economic Affairs wherein rate of interest and maturity amount for Rs. 100 denomination of Kisan Vikas Patras are given

Click here for the chart of interest Easy Chart To Compute Accrued Interest on NSC & KVP!

Therefore, barring KVP, you have option to show the interest either on receipt basis or on accrual basis i.e when you get the interest. But remember even that option as per section 145 of the I T Act applies only when you regularly maintain the accounting . That means , it is not allowed that one year you show on accrual basis and in another year you show on receipt basis.

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I bought NSC last year. Do I need to declare anything like interest earned this year for income tax?

Some one asked on Yahoo Answer -replied by me on 23/10/06

Since interest income is charged to tax under the head "Income from other sources", option is with you to show either on maturity or every year .This is as per section 145 of the I T Act which defines Method of Accounting for the purpose of I T Act. But the same method of accounting has to be followed regularly .

In my view its better to show the income on accrual basis i.e every year when it is credited. Because, the interest will be added to your income and again shall be deducted u/s 80 C of the I T Act since it is reinvested . Hence the effect is NIL. If you show it on maturity, huge amount may be inflate your taxable income of that year.

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