While most tax payers are aware that interest income is taxable, there are four types of interest income that they are likely to forget to include in their tax returns.
Interest on Locker Fixed Deposits
It is a common practice for banks, particularly public sector banks, to make it mandatory for customers hiring safe deposit lockers from them, to place fixed deposits linked to these lockers. That is, a customer wanting to hire a safe deposit locker in the bank's vault not only has to pay annual rent for the locker but also place a fixed deposit with the bank. This fixed deposit is linked to the locker. The minimum fixed deposit amount for this purpose varies from bank to bank but is normally not a large amount - mostly less than Rs 50,000. The FD is kept as a security deposit for the locker. The interest earned on the FD may be used to fund the rent payment for the locker or credited to the person's savings account with the bank or reinvested with the FD itself (in case of cumulative FDs). The FD tenure is normally several years as the deposit has to be kept with the bank as long as the locker is being used. As the principal amount of these FDs is small, often the interest per annum does not cross the interest limit of Rs 10,000 (per annum) beyond which tax is deductible at source on the interest by the bank. Consequently, TDS does not get deducted on this interest if this is the only FD that the person holds with that bank i.e. total interest income from FDs from one bank does not exceed Rs 10,000 in one year.
If the interest on such FDs is straightaway debited for the locker rent or the FD is a cumulative one, there is no corresponding interest entry in the savings account passbook of the person. As a result, the tax payer may well forget to include this interest, which is very much taxable, in his/her income tax return. It is to be noted that this interest is taxable even if it is being used to pay the locker rent.
Interest on and refund of application money
The last financial year saw a large number of bond issues being floated by various institutions in the bond market e.g. from The National Highways Authority of India, the Indian Railway Finance Corporation, the Housing and Urban Development Corporation, the Indian Renewable Energy Development Agency, NTPC, the Rural Electrification Corporation and the Power Finance Corporation. These issues were mostly heavily oversubscribed as they were tax-free bonds offering good interest rates.
Oversubscription means that a large number of applicants would have received partial allotment and refund of the balance amount of application money (for non-ASBA applicants). Along with allotment letters and refunds, Non-ASBA applicants would have received interest on application money and also interest on the amount refunded. This interest, being only for a certain number of days, is a small amount (a few thousand rupees generally) and often gets overlooked for that reason. urther, if the interest amount is clubbed with the refund amount or with the first interest payment on the bonds then also the chance of it getting overlooked is high. However, this interest on application money or/and refund also has to be included in taxable income.
Interest on NSC in the last year
The National Savings Certificates (NSC) currently on sale with the post office are of five year tenure. Interest on NSCs is cumulative i.e. is earned yearly but paid on maturity. The amount invested in NSCs at the time of purchase and also the interest accrued yearly can be claimed as a deduction from taxable income under Section 80C of the Income Tax Act subject to the total limit under this section -Rs 1.5 lakh for FY15-16 and FY16-17. The interest accruing yearly on NSCs is deemed reinvested and therefore qualifies for deduction under Section 80C within this total limit. However, the interest accrued on the NSC in the last year of the certificate's term gets paid out on maturity and is therefore not reinvested. Consequently, the interest on NSCs accruing in the last year cannot be claimed as a deduction from taxable income under Section 80C and is therefore to be added to taxable income in the year of accrual
PPF interest
Interest on Public Provident Fund accounts, credited annually, is currently tax-exempt. However, even so, one needs to declare it as 'Income claimed exempt from tax' on an yearly basis in one's tax returns, adds Vasudeva. This is something most people with PPF accounts forget to do.
Interest on Public Provident Fund accounts, credited annually, is currently tax-exempt. However, even so, one needs to declare it as 'Income claimed exempt from tax' on an yearly basis in one's tax returns, adds Vasudeva. This is something most people with PPF accounts forget to do.
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