Section 145 of the Income-tax Act, 1961 provides for taxation of income from other sources (like interest) in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Where to report KVP interest income which was offered to tax in the previous years' ITR (as such Income cannot be reported as a deduction u/s 57 nor can it be declared as exempt income u/s 10 of the Act)
26-Jul-2024
I bought Kisan Vikas Patra (KVP) worth ₹20 lakh a few years ago. Since its interest is payable on maturity and there is no TDS deduction every year or on maturity. I have been mentioning accrued interest every year in my ITR and paying tax on it, but at the time of maturity when total interest will be shown in my AIS and/or in 26AS, how will I mention that I have already paid the tax on KVP interest in the previous years?
It is assumed that you are not required to maintain and get the books of accounts audited under the provisions of the Income-tax Act, 1961. Section 145 of the act provides for taxation of income from other sources (like interest) in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Hence, if cash basis is regularly adopted, interest from KVP may be offered to tax in the year of its maturity. If mercantile basis is regularly adopted, interest should be offered to tax every year on an accrual basis.
Since you have opted to offer tax on mercantile basis, in case of any inquiry by the tax department in view of the mismatch of the interest income appearing in the AIS in the year of maturity and the interest income offered to tax, the same may be explained before the tax officer on the basis of reconciliation of the accrued amount offered to tax in past years’ tax return and other documentary evidence.
It may be separately noted that as per the current provisions of Section 194A of the Act, on maturity of the KVP, no taxes are required to be deducted on the interest income. Hence, tax due (if any) shall be required to be paid by way of self-assessment tax / advance tax (as applicable).
The article provides advice to an individual who bought Kisan Vikas Patra (KVP) for Rs 20 lakhs in 2021 and has been paying income tax on the interest accrued every year. The article suggests that the individual may offer the interest income to tax on a cash basis at the time of maturity or on an accrual basis every year if they regularly adopt the mercantile system of accounting. The article also clarifies that no taxes are required to be deducted on the interest income at the time of maturity and any tax due is payable entirely as self-assessment tax/advance tax. Additionally, the article answers a question about whether a minor can open a public provident fund (PPF) account, stating that only a guardian on behalf of a minor is eligible to open a PPF account, and only one account can be opened in the name of a minor by any guardian.
👉 In 2021, the person bought Kisan Vikas Patra (KVP) for ₹20 lakhs.
👉 They have been paying income tax on the interest accrued on this every year and including it in their income tax returns (ITRs).
👉 Since there’s no provision of tax deducted at source (TDS) on the interest earned by KVP, its consolidated interest will reflect in their 26AS and annual information statement.
👉 To avoid double taxation at the time of redeeming the KVP, they should offer the interest income earned from KVP on mercantile basis.
👉 In case of any inquiry about the mismatch of the interest income appearing in the AIS in the year of maturity vis-à-vis the interest income offered to tax in that year, the same may be explained on the basis of a reconciliation of the accrued amount offered to tax in past years’ tax return and necessary documentary evidence.
👉 As per the current provisions of section 194A of the Act, on maturity of the KVP, no taxes are required to be deducted on the interest income.
A reader asks how to avoid double taxation on the interest earned from a Kisan Vikas Patra (KVP) investment. KPMG India advises on tax implications and suggests offering the interest to tax on either a cash or mercantile system of accounting
In 2021, I bought Kisan Vikas Patra (KVP) for ₹20 lakh. I have been paying income tax on the interest accrued on this every year and also include it in my income tax returns (ITRs) . Since there’s no provision of tax deducted at source (TDS) on the interest earned by KVP, its consolidated interest will reflect in my 26AS and annual information statement. What should I do to avoid double taxation at the time of redeeming the KVP? —Name withheld on request
It is assumed that you are not required to maintain and get the books of accounts audited under the provisions of the Income-tax Act, 1961. Section 145 of the Act provides for taxation of income from other sources (like interest) in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Hence, if cash basis is regularly adopted, interest from Kisan Vikas Patra (KVP) may be offered to tax in the year of its maturity. If mercantile basis is regularly adopted, the interest should be offered to tax every year on an accrual basis.
In the instant case, you have opted to offer to tax the interest income earned from KVP on mercantile basis, which is presumably the regular system of accounting followed by you, in accordance with the above provisions. In case of any inquiry about the mismatch of the interest income appearing in the AIS in the year of maturity vis-à-vis the interest income offered to tax in that year, the same may be explained on the basis of a reconciliation of the accrued amount offered to tax in past years’ tax return and necessary documentary evidence.
It may be separately noted that as per the current provisions of section 194A of the Act, on maturity of the KVP, no taxes are required to be deducted on the interest income. Hence, tax due (if any) is entirely payable as self-assessment tax / advance tax (as applicable).
Parizad Sirwalla Updated 9 Jun 2023, 05:35 PM IST
Decision of the Gujarat High Court in the case of Sureshchandra M Shah vs. Assistant Commissioner of Income Tax (TAXAP/873/2013), dated 27th January 2014
The Gujarat High Court judgment in the case of Sureshchandra M Shah vs. Assistant Commissioner of Income Tax (TAXAP/873/2013), dated 27th January 2014, deals with the taxation of interest accrued on Kisan Vikas Patras (KVPs).
Here’s a summary of the key points from the judgment:
Background: The appellant, Sureshchandra M Shah, challenged the Income Tax Appellate Tribunal's (Tribunal) decision, which upheld the Assessing Officer's (AO) addition of accrued interest on KVPs to the appellant’s total income for the Assessment Year 2007-08. The appellant argued that the interest on KVPs should not be taxed annually but only at maturity, with the benefit of indexation.
Issue: The core issue was whether the interest accrued on KVPs should be taxed on an accrual basis annually, or only on maturity.
Tribunal's Findings: The Tribunal had found that:
KVPs are not capital assets but are treated as deposits with fixed interest rates.
Interest on KVPs accrues annually and should be accounted for in the year it accrues.
The appellant’s contention that KVPs should be treated as capital assets and taxed only on maturity was not accepted.
High Court’s Decision:
The High Court concurred with the Tribunal’s findings and dismissed the appeal.
It was noted that KVPs are issued with fixed interest rates and terms, which necessitate the accrual of interest on an annual basis under the mercantile system of accounting.
The High Court agreed that the Circular No. 687 from 1994, which directs the accrual basis for interest on KVPs, was correctly applied by the authorities.
Conclusion: The High Court found no error in the Tribunal's decision or in the application of the Circular. The interest on KVPs must be taxed on an accrual basis, not only at maturity. Therefore, the appeal was dismissed.
This ruling emphasizes the treatment of KVPs for tax purposes, affirming that accrued interest should be included in income for the year it accrues, even if the actual maturity of the KVP is in a future period.
Sources :: https://www.tenettaxlegal.com/wp-content/uploads/2014/07/Tenet-Tax-Daily-July-15-2014.pdf and https://indiankanoon.org/doc/48553940/
Is KVP taxable on maturity? Yes. KVP is taxable upon maturity. There is no tax benefit under this scheme. The interests accrued are taxable under ‘income from other sources’, paid every year.
Investment in KVP is not eligible for deduction under the 80C, and the Interest income are completely taxable. Withdrawals made after the maturity period are not subject to Tax Deducted at Source (TDS). Maturity proceeds are also not taxable since it is essential repayment of the principal and Interest (which is already taxed at the time of accrual every year).
No income tax benefit is available under the Kisan Vikas Patra scheme. Interest income is taxable, however, the deposits are exempt from Tax Deduction at Source (TDS) at the time of withdrawal. KVP deposits are exempt from Wealth tax. Income tax laws do not allow individuals below 60 years any deduction for interest earned from KVP.
But can a senior citizen claim deduction on interest earned on KVP under section 80TTB of the Income Tax Act, 1961? Section 80TTB allows a senior citizen to claim deduction on the interest earned from deposits held with bank, post office and co-operative societies. This includes interest earned from savings bank accounts, bank fixed deposits, Senior Citizens Savings Scheme, post office time deposits, post office monthly income scheme, and so on. A maximum deduction of Rs 50,000 can be claimed under Section 80TTB on all the interests earned from deposits. By nature KVP is more likely falling more in the category of bonds than deposits. This is the reason why KVP was excluded from the 80TTB deduction by the government. Hence, a senior citizen cannot claim deduction under Section 80TTB on the interest earned on KVP.
Bare Act Source :: https://www.nsiindia.gov.in/(S(h3qtrl55htdvgh55wuasoa45))/InternalPage.aspx?Id_Pk=88
Nomination: Single holders or joint holders of a certificate can make a nomination by filling up the details in Form C at the time of purchase. You can nominate any person so that the nominee will be entitled to the benefits of the certificate in the event of the death of the single holder or both joint holders. If the nomination is not made at the time of purchase, the single holder, joint holders, or the surviving joint holder can make a nomination at any time after the purchase of the certificate but before maturity by submitting the duly filled Form C. Submit it to the postmaster or bank officer where the certificate is registered. However, no nomination can be made if the certificate is applied for and held by or on behalf of a minor. If a nomination is made in this case by the holder or holders of the certificate will be canceled or altered using Form D. When you have more than one certificate registered on different dates, you have to make separate applications for the nomination, cancellation of the nomination, or variation of the nomination. Such an application will be effective from the date of its registration and will be noted on the certificate. Nominations made for the first time are free of cost. Subsequent nominations or cancellations will be charged Rs.20 per application.
