Circular No. 243

What it does

Settles the year of taxability of interest on bank reinvestment deposits, recurring deposits, cash certificates and similar schemes, where the depositor gets a single lump sum of principal and interest at the end of the term and cannot draw the interest meanwhile without terminating the deposit. The Government decides that interest for each year, calculated at the stipulated rate, is taxed as income accrued in that year, and that the section 80L deduction is available on that interest.

Why it was issued

The question had arisen whether interest credited periodically but not collectible without terminating the deposit accrued annually, and whether a depositor could claim the section 80L deduction on it.

Who it reaches

Holders of bank reinvestment and recurring deposits and cash certificates
Banks operating such schemes
Assessees spreading interest over the term for section 80L purposes

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.80L	no counterpart recorded

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

SECTION 80L l INTEREST ON SECURITIES, ETC.
582. Whether interest earned on principal amount of deposits under reinvestment deposit/recurring deposit schemes, can be said to have accrued annually and, if so, whether depositor is entitled to claim benefit of deduction in respect of interest which has accrued
1. Several banks are accepting deposits under the reinvestment deposit schemes, recurring deposit schemes, cash certificates and similar schemes. These schemes have been evolved to provide the public with an attractive medium of investment and simultaneously mobilise savings.
2. Under these schemes, a depositor invests a sum of money for a certain period of years and at the end of the contracted period, a lump sum payment is made to him. This lump sum amount comprises of the principal amount and the interest earned thereon. Normally the interest is credited to the depositor’s account at periodical intervals, but he is not entitled to collect such interest unless he decides to terminate the deposit. If he decides to terminate the deposit, he is entitled to receive back the principal amount plus interest thereon although at a reduced rate.
3. The question for consideration is whether the interest at the stipulated rate earned on the principal amount, can be said to have accrued annually and if so whether a depositor is entitled to claim the benefit of deduction, under section 80L, in respect of such interest which has accrued.
4. Government has decided that interest for each year calculated at the stipulated rate will be taxed as income accrued in that year. The benefit of deduction under section 80L will be available on such interest.
Circular : No. 243 [F. No. 178/65/77-IT (A-I)], dated 22-6-1978.

What to watch

The interest is taxed year by year at the stipulated rate, so it cannot be deferred to the year of maturity even though nothing is received till then.
A depositor who terminates early receives interest at a reduced rate, which will not match what he has already offered.
Section 80L has since been omitted from the Act, so the deduction limb of this circular no longer answers to any live provision.
Annual accrual is a two-edged rule: it spreads the income, but it also requires the assessee to offer income he has not received.

Where you meet it

On an assessment where the Assessing Officer taxes the whole of a cumulative deposit's interest in the year of maturity, or on a section 80L claim spread over years.

An example

Ours, not the Board’s: a worked case built from the rule the instrument sets, to show how it falls out.

A depositor puts money into a five-year reinvestment deposit and takes nothing until maturity. Under this circular he offers the interest at the stipulated rate for each of the five years and claims section 80L against it in each of those years, rather than bunching the whole into the fifth.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Notification No. 117 — Following debentures specified under section 3 24 March 2005
Notification No. 116 — Following debentures specified under section 3 24 March 2005
Notification No. 115 — Following debentures specified under section 3 24 March 2005
Notification No. 50 — A notification under section 3 of the Income-tax Act, 1961 11 February 2005
Notification No. 49 — Notification Notification No. 49/2005, Dated 11-2-2005 11 February 2005
Notification No. 48 — Following debentures specified under section 3 11 February 2005

← Circular No. 244 · Circular No. 242 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.

What this is