ONE of the most common ways to earn income is through interest on various deposits including bank fixed deposits. While understanding the nature of the investment is not a tough task what is required is a proper way of looking at the manner in which the accounting and taxation for this income takes place. This is especially true when there is some tax deduction at source (TDS) on the income earned because this can confuse the matters for the investor and leave them in a situation where they might consider the wrong figures in their calculations.
Interest received: The manner in which many people account for their fixed deposit interest is by looking at the amount that they have received in their bank account and then they account for this as income. So if there is a sum of Rs 22,500 received in the bank account then this will be accounted as the income earned for the year.
This might not give the exact picture because of the fact that if there is a TDS then the income received after TDS is the net figure and not the gross figure. This will result in a position where the amount equal to the TDS will not be counted for the purpose of the income.
The first thing to do under such a situation is to consider whether there is a TDS and if this is so then the amount that has been received will have to be grossed up. So for example, if the interest received is Rs 13,500 after a 10 per cent deduction then the income will actually be Rs 15,000 and not Rs 13,500.
TDS impact: On one hand the income is grossed up and the amount is increased to reflect the actual figure that has been received but at the same time there has to be an accounting for the TDS that has taken place. This will ensure that the right credit is taken for the tax that has been deducted.
The first thing to be done is that the TDS will be considered as the amount of tax that has already been paid to the government. After that from the total tax liability of the individual the amount of the TDS has to be reduced because this will ensure that the remaining amount is the figure that has to be actually paid. So for example, during the year if there is a TDS of Rs 31,500 while the total tax liability is Rs 33,000 then this leaves just the remaining Rs 1,500 to be paid.
Basis of income: There has to be some attention that is given to the manner in which the individual records the income. This can be done either on the manner of cash basis which is accounting for it when it is received or on accrual basis which means when it has accrued so that there has to be a calculation done till the end of the financial year from the date of the last receipt of the income. Here the income is accounted during the year even if not received as long as this is earned.
There has to be match between the income that is considered by the individual and what the bank considers in the TDS certificate that they are actually issuing to the investor.
The clarity on this point will ensure that there is a proper manner in which the various figures are reconciled. The TDS that has been done by the bank has to be considered in the working for the income tax calculation and hence when there is a proper match on this front, there will not be any problems for the investor who will be able to complete the entire process in a smooth manner.
