When to pay tax for long term FDs

POSTED BY PK ON February 7, 2012 6:08 am COMMENTS (4)

Hi,

I have a bank FD. Its for around 5 years. I don’t take monthly interest from it. At the end of 5 years, I get a lumpsum amount. So when should I pay the tax for this amount. Should I pay the tax only at the end of 5 yrs? Or should I be paying tax every year. Should I even show it as a source of income till the end of 5 years? The tax consultant with whom I am planning to file tax is asking me to pay it every year. But my concern is why should I pay tax every year when I am getting amount only at the end of 5 yrs.
Also, if I pay the tax every year, and in fourth year due to some emergency if I break the FD, I am going to get less interest since I did not keep it for all 5 yrs. However, I have already paid the tax assuming I will get better rate. So what should be done in such a case?

PK

4 replies on this article “When to pay tax for long term FDs”

  1. Pramod Yadav says:

    Dear DEEPAK / ASHAL / BANYAN
    There is possibility of DTC coming in Future , so if u account for cash basis , is there any chance paying less tax at the end of five year ?

  2. BanyanFA says:

    Hi PK,
    Your tax consultant is partly correct. Ideally you are supposed to pay tax on your long term FDs on a yearly basis on an accrual basis. If you end up breaking your FD, you can always amend your tax returns.

    However, there is another option to get your interest income taxed. You have two options to account for your income – Cash basis or accrual basis. Which ever basis you choose, you have to pay taxes on this basis. If you opt for Cash basis, then the entire income shall be liable for tax at the time the FD gets matured.

    For a healthy financial planning, you should go with accrual basis for the reasons specified by Ashal & Deepak.

    Regards
    BFA

  3. Deepak R khemani says:

    Your tax consultant is absolutely correct, it comes under the heading Interest Accrued But Not Paid, but your concern about early withdrawal is also correct, therefore you can also wait till the end of the period and pay tax then, hopefully the tax slabs after 5 year will be be relaxed and you may need to pay LOWER tax!

  4. Dear PK, If you opt to pay the tax at the time of maturity, please do note by that time you may move into a higher tax slab than your current one & that’s where the pinch ‘ll be hard.

    For the issue, early break up of FD, my dear friend, you have the option to rectify your prev. returns for the excess tax paid if any.

    Ultimately it’s your call, what’s more suitable to you for your own needs.

    Thanks

    Ashal

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