My mother has FD and KVP investments: Will tax be deducted on her interest income?

Fixed deposits and savings instruments like Kisan Vikas Patra (KVP) are common investment options, but many taxpayers are unsure about when tax is deducted on the interest earned.

The rules for tax deduction at source (TDS) depend on factors such as the type of investment, the amount of interest earned, and the age of the investor. A reader has asked whether her mother’s FD and KVP investments across different banks and the post office will attract TDS on the interest income.

Today's Q&A explains such details in response to a query by a reader.

Since the rate of interest for the bank fixed deposits is not mentioned, it is not possible to exactly calculate the quantum of interest likely to be credited/paid for the year and tell you whether the bank will deduct tax or not, as the same depends on the amount of interest being credited/paid every year and age of the depositor.

Interest on Kisan Vikas Patra (KVP) is not paid periodically but is paid at the time of maturity of KVP. Interest on KVP is fully taxable in the hands of the investor. Though the interest on KVP is taxable, no tax is required to be deducted on the interest paid on maturity of KVP. So no tax will be deducted on the interest paid at the time of maturity.

A person is allowed to offer the interest income either on an accrual basis or on a receipt basis. The basis on which the interest income is offered for tax has to be followed year after year consistently. The same can only be changed if the taxpayer has valid reasons to do so.

So even though you do not receive the interest on KVP every year, you can still offer the interest income every year on an accrual basis to avoid a surge in tax liability due to inclusion of the whole of the interest on KVP in the year of maturity. The same basis of offering interest for tax has to be followed for interest on bank fixed deposits in case the same is not paid annually.