Are You Reporting All Your Interest Income?

There is a reason to worry about while filing your returns, if you are not reporting the interest income for your fixed deposits.

All the interest income earned from the 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 are taxable. Even when TDS gets cuts at 10% from your bank on your FD then you are subject to pay the balance tax if you are coming under a higher income slab. Therefore, cuts TDS at 10% on your FD, you are subject to pay the balance tax if you fall under a higher income slab. Therefore, there is compliance on how you are going to report this income.

You can grant the interest income report either on build up or cash basis, you can even account the income either when you receive it or when the interest is due. For example, in the cash method, if you have invested in a 5 year bank FD where the interest payout is accumulative then you can safely postpone reporting the interest income for the first 2 years. If the interest payout is non-cumulative then you have to report the income for that year itself. Under the accrual or mercantile method, even if the income has not received then the tax has to be paid on the interest income. When the interest payout is accumulative then the investor has to report the income for each year.

Which method should you follow?  

By allowing you to postpone tax burden until later, the cash method takes away the urgent liability for those facing the cash flow problems.

Therefore, there are issues. On the products like bank FDs where the bank cuts TDS on the interest received, if it is in surplus of Rs 10,000 every year, the tax credit for the same will be applicable only in the particular year in which the income is offered to tax. As the issuer already has deducted the tax in earlier years then you will have to rectify the same in the final year

If you follow the cash method then 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 years. Even under the same slab, deferring the tax will result in a high sudden disbursement in the year of receipt. That is the reason why the experts advise the investors to stick with the accrual method. Even though you will be hit with tax on the income in which you have not received then the tax payout will be spread across many years. It is better for the individual taxpayers to follow the accrual method of accounting as it brings clarity to your financials and you can carry out your tax-planning on a yearly basis.

Bear in mind that where the TDS is not cut then 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 subjection until the maturity makes more sense. Although the total tax subjection under both the methods will remain the same and paying the tax on yearly accrual basis could mean an opportunity of loss on the money paid as tax over the years. The return you will make from the investing this money until the maturity of the instrument and then the paying tax will yield a better result.

While you are free to choose whatever method of accounting to follow, you cannot switch at any time. If you are reporting the interest income on your bank FD on the cash basis today then you cannot start reporting it on accrual basis from the next year without justification. While a one-time change in method of accounting is typically allowed, changes frequently are frowned upon by the taxman.

Tax Assist is a professional income tax consultancy in India for both corporate houses and individual tax payers; the latter comprising Salaried Individuals, Seafarers, Professionals and Non Resident Indians. 

With the help of Tax Assist and its team of income tax professionals, taxpayers can minimize their Income Tax liability, maximize their net income and create opportunities to save for current and future needs while maintaining proper accounting standards and income tax returns which are compliant with the Law.