Should Interest on Tax Saving Term Deposit Be Shown on Receipt or Accrual Basis?

I am a salaried employee. I have made a 5 year tax-saving FD for Rs.30000 and a 3 year FD for Rs.10000 in the financial year 2008-09. I am not any income other than salary and interest. I have following two questions:
1) In respect of FD of 3 years, can I pay tax on interest income in the 3rd year (i.e. cash basis) instead of paying it every year on interest accrued ?
2) In respect of tax-saving FD of 5 yrs, can it be taxed like NSC i.e. interest earned be treated as being reinvested and eligible as deduction u/s 80C ? If not, can this also be taxed on cash basis in the year of receipt of interest income?
Please help…Sumit Kumar

The income of interest can be shown on the basis of cash ( receipt  ) or mercantile i.e due basis. But once you selected a particular system of accounting , you can not change . Therefore, it is perfectly alright if for you to pay the tax on the interest on FD for 3 years on maturity only.

But if you follow that rule, you can not choose to pay tax on other fixed deposit on accrual basis. It means that for tax saving funds FDs also , you have to show income and pay tax in the year of receipt of maturity value .

In fact, Clause 14 of the  The Bank Term Deposit Scheme , 2006 which became effective from 28-07-2006 clearly stipulates a choice for subscriber to pay tax on interest on accrual or receipt basis. Read the said clause

14.Income Tax:

  • Interest on these term deposits shall be liable to tax under the Act on the basis of annual accrual or receipt, depending upon the method of accounting followed by the assessee.
  • The tax on such interest shall be deducted in accordance with the provisions of section 194A or Section 195 of the Act.

Whether you get tax deduction for amount of interest reinvested in FDs?

Yes, provided your bank with which you have opened tax saving term deposit , credits your interest annually . Remember , different banks may have different rates for tax saving term deposits and period of payment. This is as per Clause 12 of the BTDS.2006.

What is best option?

In my view, one should show the interest on FD on accrual basis as matter of tax planning because , in that case , you are spreading the interest on many years. Other wise , you may end up paying tax on all the interest in one year at one go.

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