Taxability of Interest income on Fixed Deposit

Taxpayers invest their excess fund/savings in bank as term deposit, popularly known as Fixed Deposits. In return, banks pay them an interest. This interest is taxable as ‘Income from other sources’ and hence taxpayer needs to consider the interest received from fixed or recurring deposits while filing his Income-tax return.

How should I tax my fixed or recurring deposit interest?

Ans.:- Income Tax Act, 1961 has provided two methods viz. accrual method and cash method for accounting of interest received on FDRs. Taxpayer can go for any of these methods but once any method is chosen, it should be used consistently.

What is accrual method of accounting?

In case of accrual method of accounting, incomes are recorded in the books of accounts on outstanding basis even if taxpayer has not actually realized the interest in his account.

E.g. – Mr. Vikas made a 5 year FDR of Rs. 1,00,000/- with Bank of Baroda on 1st December, 2015. FDR is having rate of interest of 8.5% p.a. Such interest is credited half yearly on 30st June and 31st December every year. How is interest taxed as per accrual basis?

Ans.:- If Mr. Vikas is following accrual system of accounting for taxation of FDR interest, then he is required to disclose such outstanding interest in his Income-tax return even if interest is not actually received by him in his bank account.

In this case, interest accrued upto 31st March, 2016 of Rs. 2,833/- (Rs. 1,00,000* 8.5%* 4 months / 12months) shall be taxed as income from other sources at the time of filing of return for F.Y. 2015-16.

What is cash method of accounting?

In case of cash method of accounting, incomes are recorded in the books on receipt basis that is taxpayer will record the income only if he actually receives such income in cash.

E.g. – Mr. Vikas made a 5 year FDR of Rs. 1,00,000/- with Bank of Baroda on 1st December, 2015. FDR is having rate of interest of 8.5% p.a. Such interest is credited half yearly on 30st June and 31St December every year. How the interest is taxed as per cash basis?

Ans.:- If Mr. Vikas is following cash system of accounting for taxation of FDR interest, then he is required to disclose such interest in his Income-tax return only if interest is actually received by him in his bank account.

In this case, Mr. Vikas has not received any interest upto 31st March, 2016 hence he will not disclose interest from FDR in his Income-tax return for F.Y. 2015-16.

What should be my method of accounting?

Taxpayers can opt for any method of accounting for interest from FDR. But taxpayer should keep in mind that any method once selected shall be used for long term and consistently.

Am I permissible to change my method of accounting once adopted?

If taxpayer wants to change the method of accounting for FDR interest, then he can change. However, such result should not lead to concealment of any part of interest in his Income-tax return. Also the new method should be used consistently.

Click here to know how to avoid taxes on your FDRs.

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Taxability of Interest income on Fixed Deposit
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Taxpayers invest their excess fund/savings in bank as term deposit, popularly known as Fixed Deposits. In return, banks pay them an interest. This interest is taxable as ‘Income from other sources’ and hence taxpayer needs to consider the interest received from fixed or recurring deposits while filing his Income-tax return.
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