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A simple ques..w/o any logical ans...give me if any one has

Ritesh Jain (CA, CS in Job) (675 Points)

28 April 2010

This has ref to my earlier topic.

Hi friends,

I have a few very-2 simple question on which I will lay further some more...so the simple ones are here:

1) Is Accrued interest on NSC (current series) taxable.?

2)Lock in period of NSC for availing tax benefit u/s 80c?

3) Treatment of principal and interest amount on maturity?

Now the ques is modified...

1)Is Accrued interest on FD taxable.?

2)Lock in period of FD for availing tax benefit u/s 80c?

3) Treatment of principal and interest amount on maturity?

Why your answer in both the cases differ if both are under 80C deduction list.

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10 Replies

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 28 April 2010

1) Is Accrued interest on FD taxable?

Yes it is taxable

2) Lock in period of FD for availing tax benefit u/s 80c?

5 Years

3) Treatment of principal and interest amount on maturity?

If accrued interest taxed every year then only the interest earned in the year of maturity taxable.

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 28 April 2010

Principal amount not liable to tax if withdrawn on maturity.

The treatment for FD & NSC is different with regards to accrued interest as the interest is reinvested in case of NSC whereas you earn only simple interest in case of a FD.

Ritesh Jain (CA, CS in Job) (675 Points)
Replied 28 April 2010

Hi Aditya,

"The treatment for FD & NSC is different with regards to accrued interest as the interest is reinvested in case of NSC whereas you earn only simple interest in case of a FD."

FD also has accrued interest in it which is compounded annually or somewhere even quarterly or halfyearly, and that is why we do accrued interest entry on 31st March.

Why not IT deptt also allows accrued int on that FD as DEdn u/s 80C like that in case of NSC???

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 28 April 2010

There is a specific circular for NSC for allowing deduction of interest on NSC

Person to whom deduction is admissible - The deduction under section 80C can be claimed by the person who has contributed the monies out of his income chargeable to tax. It can be claimed by the first-named person in a joint holding if the first-named person has so contributed the amount.

The deduction under section 80C is to be given to the person who has purchased the NSCs out of his income chargeable to tax.

The interest accruing on the subscripttion to the NSCs will be included in the hands of the person who has subscribed from his income chargeable to tax.

The amount of interest re-invested will satisfy the test of having been paid out of income chargeable to tax to get the NSC and so will be entitled to deduction under section 80C.

Where subscripttion to the NSCs in the name of any member of the HUF, is shown by the family to have been made out of its income chargeable to tax and the beneficial ownership in such certificates vests in the family, the family would be entitled to a deduction under section 80C with reference to such contribution.

The interest accrued would be included in the hands of the persons who purchased the NSC out of their income chargeable to tax.—Circular : No. 405 [F. No. 178/1/84-IT(A-I)], dated 15-1-1985 as corrected by Circular : No. 418 [F. No. 178/1/84-IT(A-I)], dated 2-5-1985.

whereas there is no such circular for FD. Also a time deposit has both option i. e. interest can be compounded and not be compounded i. e. interest amount can be withdrawn periodically. So there is no uniformity in the time deposits whereas in case of NSC interest is reinvested compulsorily.

Amir (Learner) (4016 Points)
Replied 28 April 2010

Dear Ritesh Sir,

I think

Interest under NSC gets reinvested every year & hence treated as fresh investment which qualifies for deduction u/s 80C.

Whereas Interest in case of Fixed Deposit is not necessarily gets reinvested. Even if one assumes the case of cumulative FD then also the accrued intrest cannot be treated as fresh investment for the purposes of 80C unless the remaining period till maturity exceeds 5 years.

Ritesh Jain (CA, CS in Job) (675 Points)
Replied 29 April 2010

Hi Amir,

"accrued intrest cannot be treated as fresh investment for the purposes of 80C unless the remaining period till maturity exceeds 5 years."

The same rule applies for NSC also.

If the same mechanism for accrual is followed for FD interest ,why not it is eligible for deuction even though both NSC and FD fall under same 80C list.

Thanks

Amir (Learner) (4016 Points)
Replied 29 April 2010

Dear Rachit Sir,

The same logic cannot be applied in case of NSC becos "what is eligible for deduction" is not a "6 year NSC" but its the "scheme(i:e VIII Issue)" which is eligible, in case of NSC its the schme of investment that keeps the investment locked in & not the income tax provision..

On the hand, maturity of FD is open & therefore the lock in for 5 years is provided by the Income tax to become eligible for deduction.

I hope u r getting what I am trying to put across....

Ritesh Jain (CA, CS in Job) (675 Points)
Replied 29 April 2010

Hi Aditya,

Thank you for sharing that circular , but after going through its text , as per my view that circular is related to: "Person to whom (i.e in whose hands) deduction is admissible" and not to what amount is deductible or only NSC accrued interest is deductible.

Anyways I share my views ....

A person can take 80C benefit on FD interest if he takes the interest out of bank in money terms and again reinvest it by making a FD so that he will be taxed and benefited too making a nil effect, if a person does not take out his interest portion in money terms he will be taxed and that too w/o 80C benefit. Whereas in case of NSC it is not required .

The only difference in both cases is that for NSC accrued interest 5 years lockin is not required i.e even 4th year interest is deductible which is actually invested for 2 more years only whereas in case of FD interest deduction is only when you show that interest part is also reinvested for 5 years.

The bottom line is that

Govt has taken a biased decision to benefit NSC which is for post offices and directly a govt money.

whereas FD interest are realted to banks and not govt money.

Thanks

Ritesh Jain (CA, CS in Job) (675 Points)
Replied 29 April 2010

Dear Amir,

I agree with you as the benefit of 80C is for current scheme i.e VIII issue only. Suppose I make the same arrangement with FD and show IT deptt. that I have not taken out the interest and its been compounded annually will they allow me the deduction on accrued interest on FD.

I know that NSC is different from FD. Actually the provision for NSC is different because of history of its launching and the objective to issue such NSC. By giving dedn to NSC they want to promote the instrument.

Anyways its an openended discussion.

Thankyou for sparing your valuable time.

Have a nice day.

Balaji (Knowledge Seeker) (317 Points)
Replied 29 April 2010

Dear Ritesh,

There is one more thread you have started on the same issue.Anyways,I feel you are wrong in concluding that the Govt. wanted to favour NSC because it is their money.If that be so,they could as well have extended the 80-C benefit to KVP(Kisan Vikas Patra,just as an example) but they have not.The distinguishing factor between NSC and F.D./KVP is that while NSC is blocked for 6 years(unless the holder dies or there is a decree from court),F.D./KVP can be encashed prematurely.If you observe closely,you will appreciate that the same principle is applied in case of 5-yr F.D. of Banks which is aligible for 80-C deduction.These 5-year F.D.s cannot be encashed prematurely by the holder.Trust this clarifies.Would welcome inputs from learned and analytical friends.