When you buy a bond or NCD in the secondary market, you pay the seller not only the price of the bond but also the accrued interest from the last coupon date till the date of purchase. Later, when the issuer pays interest, you receive the full coupon amount — but this includes the part you already paid to the seller. Since the tax system only sees the payment to you (not what you paid earlier), TDS gets deducted on the whole amount, leading to confusion.
Why does accrued interest get taxed twice?
- You pay accrued interest to the seller upfront.
- Later, the issuer pays you the full coupon, which includes that same interest portion.
- The system deducts TDS on the gross coupon without considering your earlier payment.
- In AIS, it looks like full income, even though part of it is actually just a reimbursement.
How can you avoid double taxation on accrued interest?
1. Claim deduction under “Income from Other Sources”
- Report the entire coupon interest received under “Income from Other Sources.”
- Then claim a deduction for the accrued interest paid to the seller at the time of purchase.
- This way, only the net interest (actual income) gets taxed.
2. Maintain proper records
- Keep proof of the accrued interest paid at the time of bond purchase (broker contract note, payment details).
- You will need this in case of scrutiny or if the tax officer asks for justification of the deduction.
3. Reconcile AIS with ITR carefully
- AIS will show the gross interest (with TDS).
- In your ITR, declare the same gross amount, but claim a deduction for the portion you already paid.
- Match the TDS credit as per Form 26AS/AIS to ensure no mismatch.
4. Practical tip
If you regularly invest in bonds/NCDs, consider maintaining a simple Excel sheet with:
- Date of purchase
- Accrued interest paid
- Coupon received
- Deduction claimed
This makes reconciliation smooth and prevents confusion at the time of filing ITR.