These days some banks have started taxing FD interest on accrual. However, if the FD is closed prematurely it can lead to a tricky tax situation. Consider this:
Principal P INR invested on Oct 1 2010 in a FD maturing on sep 30 2011
Interest I INR accrued on mar 31, T INR cut as TDS.
Now FD is premature broken on Jun 30 2011.
Interest I2 INR is paid out on jun 30 as Interest for Q1 of 2011-2012. T2 INR is deducted as TDS.
Also, due to premature breakage, INR I3 is deducted as penalty.
Case 1) I2 > I3.
This is simpler case.
Income is shown as I2-I3 for 2011-2012 and T2 is shown as tax deducted
Case 2) I2 < I3
I think this is the tricky case.
In this case, investor only got I + I2 - I3 (which is even less than I) as interest on the FD but paid T + T2 as tax.
How should this case be handled on the FY2011-2012 return? Can loss on interest income be offset against regular income? If yes, then
I2-I3 (which is negative) can reduce the other income (salary income, other FD income etc.) of the investor and T2 can be shown as tax deducted.
Please let me if I have handled both cases correctly.
Thanks!
Disclaimer: I am not a CA or a CA student.
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