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TMI BlogSome issues concerning cash management - Fixed Deposit Receipts (FDR) and loan or other credit facility against FDR.X X X X Extracts X X X X X X X X Extracts X X X X ..... Some issues concerning cash management - Fixed Deposit Receipts (FDR) and loan or other credit facility against FDR. - By: - CA DEV KUMAR KOTHARI - Income Tax - Dated:- 20-3-2014 - - 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acility/ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uing 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 premature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 draf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t / 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 hou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so 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. - - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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