
For the last financial year my bank has shown all the interest accrued on all my Fixed deposits with them in Form 26AS, although I did not receive any interest in the previous year. The maturity of these FD is in financial year 2024-2025. This has put me in a cash crunch because though I have not received any income but must show it as income in the FY in my IT return because it is shown in Form 26AS under Section 194A and I have to pay 30% tax (my I-T bracket). I have the following queries:
(a) Was the bank right in showing the accrued interest in an individual's Form 26AS when it has not actually paid it to the customer? I understand this does not become income of a person till he receives it.
(b) Do I have to pay tax on the whole interest again in the Financial year 2024-2025 when these FDs mature, and the bank credits it in my account? Will it not be double taxation? Please advise as to how I can get this situation remedied with the bank and IT department.
Reply by: Balwant Jain, a tax and investment expert
As per the income tax laws an assessee has the option to follow either cash or mercantile method of accounting in respect of his income. This option is available only in respect of income which is taxable either under the head business or income from other sources. Generally, all the banks follow mercantile system of accounting where the income and expenditure are accounted on accrual basis. So, for the bank the interest on bank fixed deposits, which has accrued till the year end though not paid is an expenditure accrued so the bank must deduct TDS on it and file TDS returns showing the details of the persons in in respect of whom the interest has accrued and TDS made. So, the bank is right in deducting tax on the interest which has accrued on your FD even if not paid during the year.
You have an option to follow either of the method of accounting in respect of bank interest as this is taxable under the head “Income from other Sources.” So, you can show your interest as taxable on receipt basis or show it as your income on accrual basis thereby matching your numbers with those of the bank. It is advisable to follow accrual method of accounting to ensure that income from interest on fixed deposits gets spread over the years of its tenure. Moreover, it is very convenient for you to avail the corresponding credit for the TDS in the same year. Please note that in case you follow the mercantile method of accounting for your interest, any interest which has been taxed in earlier year on accrual basis will not be again included in your income and taxed again in the year of receipt.
Based on the above discussion it becomes clear that you cannot do anything about the interest accrued on your bank FD being shown and reported in form no. 26AS. However, in case you follow the cash method of accounting you can claim the TDS in the year in which you show it in your income. This process of claiming TDS in the year other than the year in which it gets reflected in form no. 26 AS very tedious so it is advisable to show the interest income on accrual basis.
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