How is the interest earned from fixed deposits taxed?

     Print Edition: July 9, 2009

Q. Can I adjust the interest paid on a personal loan against salary or bank interest? How is the interest earned from fixed deposits taxed?
- T.V. Rama Rao, Bengaluru

You cannot claim adjustment of interest paid on a personal loan against accrued interest income from bank fixed deposits, salary income or any other source of income. A personal loan is taken to meet a personal obligation and the interest paid cannot be claimed as an expense from any income. Your tax liability on interest income from fixed deposits is calculated on an accrual basis. Suppose you have made a fixed deposit for five years and have chosen not to receive any regular interest payouts, and instead, you have decided to receive a lump-sum payout on maturity after five years. In this case, you will have to pay income tax annually on the interest that is credited to your fixed deposit account every year.

I have been paying my Ulip premium regularly for the past four years. However, I could not pay it by the due date in February this year due to a cash crunch. If I do so now, it would imply two premiums in the same financial year (May 2009 and February 2010). Will I get an exemption for both these premiums under Section 80C?
- Sharad Mukherjee, Durgapur

Yes, you will be entitled to an exemption for both the premium payments as long as the amount does not exceed Rs 1 lakh. This also means that if the total annual premiums for February 2009, that you have paid in May 2009, and February 2010, are more than Rs 1 lakh, you will be allowed an exemption of only Rs 1 lakh. What matters more than the number of payments is the fact that the premium has been paid and reported to your employer so that it can be shown in your Form 16.

I have a PPF account and have recently opened another one in the name of my 10-year-old son. Can my wife, who is a homemaker, also open a PPF account even though she has no income of her own?
- Harmeet Narula, Ludhiana

Though your wife does not have an income, she can open a PPF account and invest up to Rs 70,000 a year in it. She can make contributions from her household savings. You can also make deposits to her account as well as your son’s account. Any contribution that you make can be used to avail of the annual Rs 1 lakh exemption under Section 80C. However, you cannot have two PPF accounts in your name.

I earn Rs 6 lakh a year and want to invest a part of my savings in a debt fund. Should I opt for the dividend option or the growth option? Which of these is more tax-efficient?
- Hemant Joshi, Surat

Your choice, dividend or growth, will depend on the period for which you want to stay invested in the debt fund. If your investment horizon is less than a year, you should go for the dividend option, but if it is more than this period, invest in the growth scheme. This will also help you avail of the indexation benefit. If a debt fund is redeemed before a year, the capital gains are added to the net income of the investor and taxed at the normal rate. If redeemed after a year, the income is taxed at a flat 10% or 20% after indexation.

If you choose the dividend option, where you receive a periodic payment, no tax shall be levied on the dividend. However, there is a dividend distribution tax (DDT) of 14.16% that is payable by the mutual fund on debt schemes. The DDT is even higher, 28.33%, in case of liquid funds. This is eventually passed on to the scheme and deducted from the net asset value (NAV). However, this amount is still less than the 30% tax you will pay in your case.

I have some shares of IDBI in the physical form. Can I sell them without opening a demat account?
- Surinder Rahi, Bhopal

No, you cannot do so because according to Sebi rules shares can be transferred only in the dematerialised form. So, you will have to convert your shares. It will take three-four weeks to dematerialise the shares. You will have to open a demat account with a stock broker so that you can trade these shares. This broker, by virtue of being a depository participant (DP), will be able to assist you with the process. The DP will send your physical certificates to the registrar and the transfer agent, who will check them vis-a-vis their records. If everything is in order, they will cancel the certificates and the shares will be credited to your demat account. Keep a photocopy of your certificates so you know the number of shares and their serial number in case of a problem.

I bought an apartment in 2007, which is owned jointly by my wife and I. The home loan too has been taken by both of us, but the account from which the EMI is deducted is not held jointly. The interest component of the loan is more than Rs 3 lakh a year. Can both, my wife and I, claim tax benefit?
- Jagdish Bhat, Visakhapatnam

You have not mentioned whether your wife is transferring any amount to the account from which the home loan EMIs are being deducted. Even if you are paying the full EMI from your income and your wife is not contributing towards this, she will be eligible for deduction of interest under Section 24 as she is a joint owner of the property and also a joint applicant for the loan. This is because the deduction on interest is on ‘due basis’, not on the basis of payment. However, deduction on principal under Section 80C will not be allowed as it is on payment basis.

If the house is rented out, joint owners can claim the entire amount paid as interest on the loan for deduction. For self-occupied property, the maximum amount every co-owner can claim is Rs 1.5 lakh.

Q. I had spent Rs 19,500 for a pregnancy-related treatment for my wife in December 2008. As medical expenses during pregnancy are not covered under health insurance, I could not claim compensation. Am I entitled to a deduction under Section 80DDB for such expenses?
- Rakesh Shreshta, Nagpur

Deductions under Section 80DDB are allowed only if an individual has paid for the treatment of specified diseases, such as neurological problems, cancer, AIDS, chronic renal failure, haemophilia and thalassaemia. Gynaecological problems are not covered by it. Hence, you will not be eligible for deduction under this Section.

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