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| Get a fix on FD returns |
| Arnav Pandya / New Delhi Mar 14, 2010, 00:45 IST |
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Maturity date and interest income must be accounted for
Fixed deposits (FDs) are simple instruments, where the earnings are known at the time of making the deposit. But, matching the amount of interest earned on these deposits with the amount received and the tax deducted at source can be tough.
CASE STUDY
Rajesh invested Rs 100,000, for one-year each in two FDs, in the financial year 2009-10. One deposit was made in the beginning of the 2009 and would mature in March 2010. The rate of interest was seven per cent. The second deposit was made on July 1, 2009 at 7.2 per cent. Both pay out simple interest cumulated at maturity, though for accounting purposes the amount accrues to the investment at the end of each quarter. If Rajesh considers the interest earned when it is received, how should he account for the second deposit? What about matching the interest earned with the tax deducted by the bank?
TACKLING THE ISSUE
First, determine the manner of recognising the income or interest earned. One is the accrual method, whereby the amount accrued on the deposit during the year is considered as income, even if not received. Or, consider the income when actually received, the cash way of accounting.
An investor would find it very convenient to adopt the former method, especially when the income with a bank crosses Rs 10,000 in the year. And there is Tax Deduction at Source (TDS), because this will be in tune with the route adopted by the bank.
The bank considers the income earned by the depositor till the end of financial year and then deducts the tax on it.
The tax authorities have said banks should deduct TDS only on the amount credited and not on the provisions made. So, Rajesh should know when the income is being credited to his account, in this case, quarterly, and this is the figure to be taken for accounting purposes.
Here, the income will be received with the maturity, for the deposit that maturing in March 2010. Hence, the interest earned will be Rs 7,000 for the year. This interest earned will be included in the investor's total income. This is the simple part, where the income is actually received, so there is no complication.
The second deposit will also pay the amount at maturity. This is a one-year deposit maturing on July 1, 2010. Since the deposit clearly says the amount accrues at the end of every quarter, there is a need to consider the income earned till the end of March. The same will be done by the bank and they will use this for tax deduction. The income earned, here, will be Rs 5,400 till the end of March. Therefore, the investor should consider the income till March 2010, even though he may not have received the amount from the bank.
THE TRICKY PART
The tricky part is the alignment for taxation. The investor will get the net amount after TDS, as the amount of interest earned crosses the threshold limit of Rs 10,000 during the year. To make it simple, let’s consider the interest rate at 10 per cent used (without cess) for tax deduction. The amount received by Rajesh will be reduced by Rs 1,240 (10 per cent of 7,000 plus 5,400) for the TDS and the net amount received will be Rs 4,160.
When it comes to total income earned during the year, Rajesh cannot add the amounts received, as there is a TDS amount involved. He has to gross the total amount earned. This will be Rs 7,000 plus Rs 5,400, that is a total of Rs 12,400. This figure will be included in the income for the year under the head of income from other sources. Now, the total amount of income and the tax payable on this income will be calculated. And from that, the TDS amount already deducted by the bank, Rs 1,240, will be adjusted and this would complete the process.
The writer is a certified financial planner
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