Tax liability on interest on fd

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

16 September 2013 sir i want to know that a village panchayat has received a grant for village development & they want to invest money in fd. can u pls suggest me the treatment/tax liability on interest arising out of fd in previous year in which fd is made?

Querist : Anonymous

Querist : Anonymous (Querist)

13 October 2013 SIR PLS ANSWER SOON?

Querist : Anonymous

Querist : Anonymous (Querist)

03 December 2014 Are panchayats profits not taxable?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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26 July 2025 Your question is very important, especially when dealing with public funds like grants received by **village panchayats**. Let’s break this down clearly:

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## 🔍 **Situation Summary**

* A **village panchayat** receives a **grant** for development work.
* The panchayat **invests the grant in a fixed deposit (FD)**.
* You want to know:

* Is **interest on FD taxable**?
* Are **panchayats exempt from tax**?

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## ✅ **Answer: Interest is **Exempt** under Section 10(20)**

### ✅ **1. Village Panchayats Are Local Authorities**

Under the **Income Tax Act**, **village panchayats** fall under the definition of **"local authority"**.

### ✅ **2. Section 10(20) of the Income Tax Act** provides that:

> **Income of a local authority** which is **chargeable under the head "Income from house property", "Capital gains", or "Income from other sources"** is **exempt**, **if derived from the conduct of their activities as a local authority**.

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### 🔹 So in your case:

* The **interest earned on FD** is income under **"Income from Other Sources"**.
* Since the **grant was for village development**, and the interest earned is also to be used for **public purpose**, it is **exempt under Section 10(20)**.

✅ **No tax liability** arises on that interest.

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## 🔍 Important Conditions

To ensure the exemption applies:

1. The panchayat must be a **validly constituted local authority** under state laws.
2. The **interest income must be used** for **village/public purposes**, not for any commercial/private activity.

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## ⚠️ **Caveat — Filing Requirements**

Even though exempt:

* Some local authorities **may still need to file ITR-7**, especially if they have TDS deducted or if required by the Income Tax Department.
* If **TDS is deducted on FD interest**, the panchayat can **claim refund** by filing ITR-7.

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## ✅ Summary

| Question | Answer |
| -------------------------------------- | -------------------------------------- |
| Is village panchayat taxable? | ❌ No, considered a **local authority** |
| Is FD interest taxable? | ❌ **Exempt under Section 10(20)** |
| Is ITR filing needed? | ✅ Only if TDS deducted or required |
| Can they claim TDS refund on interest? | ✅ Yes, through ITR-7 |

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Let me know if you’d like:

* A sample **no-deduction declaration** for banks (to avoid TDS on FD interest),
* Or guidance for **filing ITR-7** for a panchayat.

Happy to help!

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