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Interest from bank

Ritesh Mitra (S.A.E.) (28 Points)

23 November 2015

Sir,

I had some fixed deposits which was matured in this F.Y. Those deposits alongwith the interest amounts were automatically reinvested for the same term.

I like to know that if those Interests will be counted under the head of "Interest received from Bank" ?

With regards,

Ritesh Mitra

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Miss Rinkal (Student) (1304 Points)
Replied 23 November 2015

Yes, the interest reinvested will form part of income from other sources. However if such interest has already been considered on accrual basis then such part of interest will not be reconsidered.

To illustrate to my explanation, suppose FD was made on 01-10-2014 for a period of 1 year. The interest accrued for the period of 01-10-2014 to 31-03-2015, then that would not be reconsidered as income. And interest from 01-10-2015 to 31-03-2016 will be forming part of income from other sources for fy 2015-16. In such case, interest income would be a mix of initial FD interest and reinvested FD interest.

But if interest is considered on receipt basis then initial FD interest will be taxed for fy 2015-16. And reinvested FD interest will be forming part of income of fy 2016-17

Needless to say, it is always better to record interest on accrual basis rather than on receipt basis.

In either case, the interest amt reinvested will be taxed for the fy because you have derived income out of initial investment and that interest income will not be considered as principal amt. Such interest income will considered as part of principal amt only in reinvested period and not when recd it initially. Automatic reinvestment of principal + interest is presumed to be that such interest amt is recd.

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