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T. Banusekar

HOW IS NSC interest accrued to be treated for tax purposes? Will long-term capital gains be taken as part of gross total income for the purpose of determining the percentage of rebate that a person is entitled to under Section 88?

N. Kalyanaraman

Reply

If you are following the mercantile system of accounting in respect of NSC interest, the accrued interest will be treated as income subject to deduction under Section 80L. At present, the deduction is available up to a maximum of Rs 12,000 in respect of certain kinds of income, which include interest on NSCs.

An enhanced deduction of Rs 15,000 would, however, be available under this section if such income includes interest on government securities. It may be noted that incomes other than interest on government securities will not qualify for the enhanced deduction. The deduction, in no case, can exceed the incomes that qualify for the deduction and which are included in the gross total income.

Since the interest that accrues on NSC interest, except in the last year, is not paid to the holder but is only reinvested automatically, the same will also qualify for rebate under Section 88 subject to the conditions under that section being satisfied.

If you follow the cash basis of accounting the entire interest will be treated as income only when the NSC matures and the same is realised. No rebate under Section 88 will be available, as there is no reinvestment. However, deduction under Section 80L will be available subject to the limits stated above.

Generally, it would be advisable to follow the mercantile system of accounting in respect of this source of income, namely, NSC interest.

Section 112 of the Act provides that the total income shall be reduced by the amount of long-term capital gains and the total income so reduced shall alone be eligible for rebate under Section 88. As a result, long-term capital gains (LTCG) do not qualify for the rebate under Section 88.

This part of Section 112 does not seek to confer a benefit on an assessee but, on the other hand, seeks to disable an assessee from making a claim for rebate under Section 88 against the LTCG.

It would not be permissible to interpret this in such a manner as to say that LTCG will not form part of the gross total income for the purpose of determining the percentage of rebate that can be claimed by an assessee.

At any rate, Section 112 does not provide for LTCG as not forming part of the gross total income. The LTCG of an assessee will have to be included as part of the gross total income in computing the percentage of rebate that can be claimed under Section 88.

Query

You stated in a recent article that the percentage of rebate available under Section 88 will depend on the gross total income of the assessee and not on the total income of the assessee.

You also stated that gross total income means the income computed before deductions under chapter VI-A. Kindly clarify which are the sections that fall under chapter VI-A.

Badrinath

Reply

The deductions that are available under chapter VI-A are comprised stated in Sections 80CCC to 80U of the Act.

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