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Can i pay tax on kvp interest earned upon maturity?

rp (s) (31 Points)

24 July 2014

An investment was made in KVP in July, 2010. And, we have not been paying tax on accrued interest for the past three financial years. Our thinking is that we will pay the tax on accrued interest when we get it in our hands upon maturity. I believe it is okay, but just realized that I should ask for a second opinion.

Please let me know.

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6 Replies

CA Suraj Lakhotia (IndigoLearn) (4898 Points)
Replied 24 July 2014

You have a choice to either pay it on accrual or pay it on receipt. It is better to pay it on receipt.

1 Like

rp (s) (31 Points)
Replied 24 July 2014

Many thanks Mr. Lakhotia for confirming my understanding. Can you please tell me where (in which circular, etc.) I can find more information on tax treatment of KVP interest? Everywhere I read it seems to imply that we have to pay tax on interest accrual.

CA Suraj Lakhotia (IndigoLearn) (4898 Points)
Replied 25 July 2014

I stand Corrected. The explanation given above is a general rule for tax treatment of Income from Other Sources as per Section 145 which provides -

"Income chargeable under the head" Profits and gains of business or profession" or" Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee...."

However, CBDT has issued a circular in 1994, providing that Income on KVP has to be assessed on Accrual Basis. Based on this circular, Interest component has to be assessed as per accrual system i.e on a yearly basis.

Please ignore my earlier reply

2 Like

rp (s) (31 Points)
Replied 25 July 2014

Wow... so in that case, what should we do now? For this FY, we can go ahead and add the KVP interest accrued in the income from other sources. However, what do we do for the returns of three FY prior to this? Amending returns for three FYs and resubmitting them seems like a lot of work to me.

Instead of changing the course now, what if we stick to our plan of showing KVP interest on the return upon maturity? What is the worse that can happen? Surely IT department cannot think that we are trying to evade taxes as we will be paying taxes on the interest income upon maturity. Just not on an accrual basis though.

Not sure why CBDT would want people to pay taxes on money they haven't seen. PO doesn't give us interest in our hands each year. So how can I pay tax on the interest money that I don't have in my hands yet? If they wanted us to show interest on accrual basis, they should have asked post office to do TDS (just like FD interest). This is a big problem for people who have invested a lot of money through KVP as the tax liability on interest accrued tends to run into thousands and possibly lacs each FY. It poses a taxation cash flow management problem. This CBDT guideline is illogical.

Please please comment. I really appreciate your guidance, Mr. Lakhotia. Thank you.

CA Suraj Lakhotia (IndigoLearn) (4898 Points)
Replied 25 July 2014

We need to follow things which are illogical but are legal. You get a interest computation factor for KVP at https://www.taxvani.com/2013/03/kvp-interest-rate-chart.H T M L

You cannot rectify all returns of the past years. There is a limit on revised return. You can show the entire accrued interest for the past years in the current year and continue showing the interest earned in each year in future. Since there is no malafide intention, there should not be any worry. You want to pay tax honestly which should be appreciated.

Regards

Suraj.

1 Like

rp (s) (31 Points)
Replied 25 July 2014

Many thanks once again!

First off, It is great to know that I don't have to amend the returns for the past years. In which case -

1) These KVP investments were made in my and my spouse's name (issue type is joint). So should we distribute the interest income on both our returns?

2) Should we be paying penalty on the late payment of taxes for the KVP interest accrued in the past three financial years (2010-2011, 2011-2012, and 2012-2013)? From what I understand from your reply above, it seems that you are implying that we should just declare interest income as if it was all accrued in this year, and then pay the tax on it. If that is the case, then there is no penalty to talk of, correct? Please confirm.

3) Just like there is a time limit on filing a revised return, is there a time limit on auditing a submitted return? For instance, how long back in time can IT-Dept go to make their claims? In the US, for instance, as per the statute of limitations, the IRS cannot audit a return after 3 years of its filing. In other words, it has three years to make its claim. Do we have similar such statute in India?

Once again, truly appreciative of your advise given so freely.