For senior citizens, the threshold limit for tax deduction on interest is ₹1 lakh for a year, while for non-senior citizens, the limit is ₹50,000 for a year. According to reports from The Economic Times, this threshold limit for no deduction of tax applies to fixed deposits made with all the branches of a bank taken together. For senior citizens, banks will deduct tax at 10% on the interest credited/paid every year if the interest amount exceeds ₹1 lakh.
Interest on Kisan Vikas Patra (KVP) is not paid periodically but is paid at the time of maturity of KVP. As reported by The Economic Times, interest on KVP is fully taxable in the hands of the investor, though no tax is required to be deducted on the interest paid on maturity of KVP. Therefore, no tax will be deducted on the interest paid at the time of maturity.
Since the rate of interest for 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. According to The Economic Times, banks will deduct tax at source if the aggregate interest on all the fixed deposits made with all the branches of a particular bank exceeds ₹50,000 for non-senior citizens. The tax will be deducted whether the interest is actually paid or is just added to the fixed deposit in case the fixed deposit is cumulative.
A person is allowed to offer the interest income either on an accrual basis or on a receipt basis. As reported by The Economic Times, 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. 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.
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. According to The Economic Times, 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. These considerations are crucial for understanding the tax implications of different investment structures and their impact on overall tax liability.
