Some issues concerning cash management - Fixed Deposit Receipts (FDR) and loan or other credit facility against FDR.

[CA DEV KUMAR KOTHARI]

Deposits and loans banking offers:

In present days of banking products/ deals and options available making Fixed deposits in banks and obtaining credit facility in different manner like  revolving credit facility/ over draft facility or loan against FDR/ TDR from the same  bank are options available  to increase income, maintain cash-liquid facility.

By such arrangements funds remain deployed in FDR/ TDR and in case of need funds are available by way of loan or over draft facility.

By making FDR/TDR and obtaining loan or overdraft facility, dual relationship with bank can be maintained, there is more interaction with bankers, and these relationship are useful devices to maintain banking facilities more meaningful by strengthening business relations with bank.

These activities are systematic cash management with a view to increase gains by way of interest earning  and reduced interest burden.

Premature encashment or loan- commercial expediency:

In case of need of funds, a  FDR/TDR can be encashed prematurely,  however, at a penalty by way of lower rate of interest. Suppose you have a FDR of five years carrying interest @ 8.75% per annum credited at quarterly rests.

Now suppose you temporarily need funds after two years from making the deposit. The remaining period of FDR is three years.   If you prematurely en-cash FDR, bank will allow interest rate applicable for two years FDR and will also charge some penalty. Thus there will be a loss of about  3- 3.5%.

 Instead of premature encashment of FDR other option available is to take  loan against FDR/TDR which is very much preferable, because loan can be repaid at any time when other funds are available or on maturity of FDR proceeds of FDR can be used to repay outstanding loan.

By keeping FDR continuing and obtaining loan or availing over draft facility, one can have more beneficial position so far net interest income is concerned. Besides,  possibility of other cash inflow, to enable repay temporary  loan taken can be availed, without disturbing gains on FDR.

Interest paid on such loan have direct nexus to hold FDR:

Therefore when a loan is taken against FDR instead of prematurely en-cashing FDR, there is commercial expediency. Taking loan, interest paid on loan are  intimately linked to maintaining and  continuing holding of fixed deposit and  earning interest thereon.

Therefore, such arrangements need to be looked as a systematic and organized banking operations / cash management to increase earning of income and / or  reduce interest burden.

Rate of interest is higher in case of FDR in comparison to saving accounts so earnings increases. In case of credit facility by way of overdraft facility or loan facility against FDR  rate of interest charged is lower than other loans.

Keeping money invested in FDR/ TDR improves effective deployment of funds while maintaining liquidity by way of loan or over draft facility. As and when funds are required over draft / loan can be used and as and when funds are available over draft / loan can be repaid to reduce interest burden.

Therefore, interest paid on loans taken, instead of premature encashment of FDR, to meet temporary fund requirements / short-term fund requirements can be considered as expenditure to keep and continue holding in FDR to earn interest. Therefore, such interest should be allowed as an allowable expenditure for earning interest of FDR also.

Interest on loan may be allowable as business expenditure:

In case the loan so obtained against FDR, and capital borrowed is used  for business purposes or for making other earnings, then interest shall also be allowable as interest on capital borrowed for the purpose of business or for the purpose of earning other income.

For example, suppose any business asset is purchased  or any expenses are incurred  in course of any  business within meaning u/s 2(13) of the I.T.Act, then the interest on  capital borrowed shall be allowable as business expenditure u/s 36 or 37 or s.28 red with s. 145 , as the case may be.

In case a house property is purchased, the interest may be allowed under head income from house property.

In case from the loan any other asset is purchased or any business need are met, then also interest can be allowed.

 Therefore, in such situations, interest paid on loan is allowable under head ‘other sources’ as an expenditure incurred to maintain and continue to hold an income earning asset in form of fixed deposit. And depending on use of borrowed capital, the interest may also be allowed under some other head of income or against income from some other source of income.

Proper claim:

Depending on facts and circumstances of case (FDR and loan and utilization of loan etc.) claim should be made properly.