Your Taxes

I have invested in a fixed deposit for five years and have opted for reinvestment on maturity. Will my interest be counted as income every year or only in the year of maturity? Should I pay tax on interest each year or only on maturity?

Niloy Das

According to the Income Tax Act, 1961, income chargeable under the head "Income from other sources" shall be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee.

The interest will be taxable as per the accounting system followed by you, i.e. a cash or accrual basis. In case of a cash basis, it will be taxed as income from other sources in the year of maturity when you receive the funds. In an accrual system, the interest income will be taxed on a year-on-year basis, based on the annual interest certificate issued by the bank.

Technically, the credit of the tax deducted by the bank shall be given for the financial year for which such income is assessable. But considering the online credit mechanism, your Form 26AS may not match with the TDS claimed in the tax return if you follow a cash basis system of accounting. Hence, it is advisable to adopt an accrual basis of accounting wherein the income offered to tax and the TDS credit claim matches with your Form 26AS for each financial year.

Three of us in our family have fixed deposits held as ‘either or survivor’/‘anyone or survivor’. One of the joint account holders withdraws interest periodically in all the cases. How is this treated as per income tax laws? Is it is treated as the income of the first named person in each deposit account, or as the income of person who has withdrawn the interest, or as the income of the all account holders of the individual deposit account? Please advise.

Honey Thomas

According to the provisions of income tax law, in case of fixed deposits opened in joint names, all holders are assessable to tax in relation to interest earned on the portion contributed by them individually toward the fixed deposit. Further, if only one person has contributed to a deposit held in joint names, the interest will be taxable in the hands of only the person who has actually contributed toward the fixed deposit even though the FD is jointly held.

We understand that you have opened certain fixed deposits with your family members in joint names. Assuming that the funds were contributed by all the joint holders toward the fixed deposits, interest earned on such fixed deposits will be taxable in the proportion contributed by each joint holder, irrespective of who is the first holder. Necessary documents may need to be submitted with the tax officer to prove the proportion contributed, if asked for.

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