Wealth Tax-Inclusion of interest on cumulative bank deposits and NSC in net wealth of assessee. - Income Tax - 1833/1990

INSTRUCTION NO. 1833/1990 Dated: January 11, 1990 A question whether accrued interest on Cumulative Bank Fixed Deposits and National Savings Certificates, where the interest is payable on maturity should be treated as an asset to be included in the net wealth of an assessee, has been raised for consideration of the Board. 2. Rules governing National Savings Certificates Series VI and VIII provide that interest as specified in the table given in the notification shall accrue to the holder/holders of the certificate and the interest so accrued will be deemed to have been reinvested on behalf of the holder and aggregated to the amount of face value. The rules also deem the interest on these certificates liable to tax under the Income-tax Act 1961 on the basis of the annual accrual. The amount of interest accrued should, therefore, form part of the wealth of the holders of the certificate. Since under Series VII of the N.S.C. the interest is payable on six monthly basis, the question of the nature of treatment to be accorded under Wealth Tax Act does not arise. 3. The accrued interest under series VI and VIII will however, be eligible for deduction under section 5(1)(xvi) read with section 5(1A) of the W.T. Act. 4. Cumulative Bank Deposits are regulated by the Reserve Bank Rules, which provide that if payment under a term deposit is made before the completion of the period originally agreed upon, the rate of interest payable in respect of such term deposit shall be the one applicable to the period for which the deposit remained with the Bank less 1% penalty for a pre-mature withdrawal. However, in the event of premature closure or withdrawal of a deposit under reinvestment plan, which provides for reinvestment of the interest, interest as permissible shall be paid on a compounded basis with quarterly or longer rests for the period during which the deposit remained with the Bank. This would indicate that interest does accrue to the assessee and that it is not correct to say that if the FDR is pre-maturely encashed, no interest will be payable. Therefore, on the basis of accounting method adopted by the assessee, for income-tax purposes, the interest accrued will be liable to be taxed under wealth-tax Act also. The accrued interest would qualify for deduction as "Bank Deposit" in a banking company under section 5(1)(xxvi) read with section 5(1A) of the Wealth-tax Act. 5. The above instructions may be brought to the notice of all officers working in your region.