16 June 2008
Under the Income Tax Act Individuals can compute their taxes either on cash basis or on accrual basis.
Still why is it that many people get into the process of computation of accrued interest on their NSC certificates held and take that into account while computing their yearly taxes?
They take accrued interest on NSC under the head - Income from other sources and show the same as deduction u/s 80C.
Is not it simpler to only show the interest earned during the year of maturity of NSC as income from other sources in the year of maturity of NSC?
Although one can follow cash or Accrual method....Accrual concept is the most scientific and rational approach....Infact Accrual concept is one of basic assumption of accounting priciples according Accounting Standard-1..If interest accrued on NSC is not accounted on yearly basis it does not give correct picture of income of an individual as interest at the time of maturity belongs to not only year of maturity but spread over (LOCK IN PERIOD )life of NSC...
IF one opts for declaring NSC accrued interest every year till maturity, Should he also similary account FD interest assuming the FD period exceeds one year span?
In other words , can one follow Accrual method for NSC accrued interest and Cash method for FD interest?
16 June 2008
Well...another basic assumption according to AS-1 is CONSISTENCY in following accounting policies...so u should follow either Cash or Accrual..its not scientific follow both...
For the purpose of applicability of Accounting Standards, enterprises are classified into three categories, viz., Level I, Level II and Level III. Level II and Level III enterprises are considered as SMEs. The criteria for different
Level I enterprises are required to comply fully with all the accounting standards. 3. It has been decided that no relaxation should be given to Level II and Level III enterprises in respect of recognition and measurement principles. Relaxations are provided with regard to disclosure requirements. Accordingly, Level II and Level III enterprises are fully exempted from certain accounting standards which primarily lay down disclosure requirements. In respect of certain other accounting standards, which lay down recognition, measurement and disclosure requirements, relaxations from certain disclosure requirements are given. The exemptions/relaxations are decided to be provided by modifying the applicability portion of the relevant accounting standards.
16 June 2008
Please note that the individual in my case is an salaried employee and not an sole propritory concern. He does not prepare financial statments.
Interest on NSC is taxable under the head 'Income from other sources'.
Generally, it is advisable to declare accrued interest on NSC on a yearly basis. So, over the period of six years, you could declare the interest income for each year. In such cases, it does not amount to a huge sum.
If you do not declare the interest on an accrual basis, then the entire interest earned (difference between the amount deposited and the maturity value) would accumulate in the year of maturity. You could then claim it under Section 80C, but it would be a huge amount and would be taxable at the current applicable tax rate.
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