The Hindu : Interest — when does interest on deposits accrue?

Online edition of India's National Newspaper
Monday, Mar 15, 2004

Business

Business

Interest — when does interest on deposits accrue?

Q: I have come back to India after 12 years abroad in May 2000. I had transferred my FCNR deposit to RFC account and was claiming exemption as a resident but not ordinarily resident. In view of the change in law, I have become resident and ordinarily resident from assessment year 2004-05. I am aware that I will not now be exempt on the interest on my RFC accounts on my current income taxable for assessment year 2004-05. I would like to know whether the interest credited to my RFC account reinvested as ordinary account on maturity of the deposit can be treated as received by me, since I am keeping accounts on cash basis?

A: Interest on fixed deposit can be offered on accrual basis from year to year or on receipt basis on maturity of fixed deposits. But where interest is credited to the account of account holder or where it is renewed along with interest on the maturity of fixed deposit amount, it has to be treated as receipt. A credit in one's bank account amounts to receipt by the account holder. Cash system of accounting does not mean that it should be cash received by the assessee. A credit to bank account is equally a receipt. It is true that if such interest is credited in the accounts of any third party, such interest cannot be taken as receipt. But interest from the bank is different, because the bank holds money on behalf of the account holder. Even where bank collects cheques, dividends, bills, promissory notes and the like for credit to customer's account, the bank is acting as the agent of the customer. This is the essence of banking business. The relationship of the banker and the customer is not necessarily different as between current account and fixed deposits. Since he can draw the fixed deposit amount on maturity, interest receivable on maturity is treated as received, though it is not drawn.

The Central Board of Direct Taxes in Circular No. 243 dated June 22, 1978 has, however, advised that even in case of reinvestment deposit schemes, recurring deposits and cash certificates, it is possible to treat the income as taxable on annual basis on the ground that the banks provide for interest on such deposits in their own accounts, though it had not become due and payable except as provided under the terms of the deposit. But the circular should be taken as a concessional one, which is to be understood as taxable on accrual basis, when it advised as under:

"4. Government has decided that interest for each year calculated at the stipulated rate will be taxed as income accrued in that year. The benefit of deduction under Sec. 80L will be available on such interest."

It may be seen that the Circular is intended to benefit persons, who like to avail Sec. 80L relief, but may not otherwise be able to avail the same on year to year basis, because of the bunching effect on long-term deposits losing for the depositor such interest as in excess of the ceiling under Sec. 80L in the year of receipt. Hence, it may be possible even for those who keep accounts on cash basis to avail the benefit of the circular for purposes of Sec. 80L of the Act. It is otherwise not possible to treat it as having been received. It is possible that those who convert FCNR or NRE Account to RFC account, when it becomes taxable or to NRO account can avail the concessional rate of 20 per cent at their option under Sec. 115H, if they continue the amount as deposit in the bank.

S. Rajaratnam

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