Whenever I purchase bond / NCD, I also have to pay accrued interest during time of payment along with principal amount of bond. This accrued interest is then returned to me in next payment cycle of bond.
Now the issue is that the accrued interest returned to me also has TDS deducted and is reflected in my AIS.
This mean that I first paid accrued interest part to original seller while purchasing the bond and now after I have bond, I again pay tax on accrued interest.
How can I overcome this scenario considering bond payments are reflected in AIS?
The situation you’ve described is common when purchasing bonds or NCDs in the secondary market, where accrued interest is paid to the seller at the time of purchase and subsequently returned to you during the next interest payment cycle, subject to TDS (Tax Deducted at Source). Here’s how to address this issue to ensure you’re not unfairly taxed:
- Understanding the Problem
- Step 1: At the time of bond purchase, you pay accrued interest to the seller. This is effectively a reimbursement for the interest earned by the seller up to the date of sale. This amount is not income for you but rather an adjustment to your cost.
- Step 2: In the next bond interest payout cycle, you receive the full interest, including the accrued interest portion you already paid. However, TDS is deducted on the entire interest payout.
This creates a mismatch because:
- The accrued interest you paid is already an outflow for you.
- You are paying tax on the accrued interest returned to you.
- Tax Treatment of Accrued Interest
The Income Tax Act provides for adjustments in such cases to avoid double taxation. Here’s how you can handle it:
(a) Claim the Accrued Interest as a Deduction
Under Section 57 of the Income Tax Act, you can claim the accrued interest paid at the time of bond purchase as a deduction against the interest income you receive. This ensures that you are taxed only on the actual net interest earned during the holding period of the bond.
(b) Example Illustration
- At the time of purchase, you pay ₹10,000 as accrued interest to the seller.
- In the next interest cycle, the bond issuer pays you ₹30,000, which includes ₹10,000 of accrued interest.
- TDS deducted on ₹30,000 (say, 10%) = ₹3,000.
- In your tax return:
- Report ₹30,000 as interest income.
- Claim a deduction of ₹10,000 under Section 57 for accrued interest paid.
- Net taxable interest = ₹30,000 - ₹10,000 = ₹20,000.
- Automating for Future Transactions
If you deal frequently with bonds or NCDs:
- Spreadsheet Tracker: Maintain a tracker for accrued interest paid and received to calculate net taxable income easily.
- Professional Assistance: Consider consulting with a tax professional to handle bulk transactions or complex scenarios.
Would you like guidance on setting up a tracker or drafting a tax calculation for your case?