Circular No. 406

592. Interest on deposit made under National Deposit Scheme - Whether taxable in the year of accrual

What this is

Circular No. 406 was issued by the Central Board of Direct Taxes on 15 January 1985. Its subject is 592. Interest on deposit made under National Deposit Scheme - Whether taxable in the year of accrual.

What it does

Fixes the year of taxability of interest on National Deposit Scheme deposits. The Scheme was launched from 30 July 1984 and interest is paid or compounded half-yearly. The Central Government amended the Scheme so that for deposits made in financial year 1984-85, interest up to 31 March 1985 is deemed to have accrued on 31 March 1985 even though actual payment or compounding is half-yearly. The Board's view is that such interest is taxable in the year of accrual.

Why it was issued

The half-yearly payment or compounding cycle did not align with the year end, and the amendment to the Scheme created a deemed accrual on 31 March 1985; the Board states how that interest is to be taxed.

Who it reaches

Depositors under the National Deposit Scheme who deposited in financial year 1984-85
Assessees on the cash basis who would otherwise offer the interest on receipt
Assessing Officers taxing that interest in assessment year 1985-86

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.

592. Interest on deposit made under National Deposit Scheme - Whether taxable in the year of accrual
1. The National Deposit Scheme was launched by the Central Government with effect from 30-7-1984. Interest on deposits under this Scheme is paid or compounded on half-yearly basis. The Central Government has amended the Scheme to provide that in respect of deposits made in financial year 1984-85, interest up to 31-3-1985 will be deemed to have accrued on 31-3-1985 even though the actual payment or compounding is made on half-yearly basis.
2. The Board is of the view that such interest is taxable in the year of accrual.
Circular : No. 406 [F. No. 178/289/84-IT(A-I)], dated 15-1-1985.

What to watch

The deeming is confined to deposits made in financial year 1984-85 and to interest up to 31 March 1985, as the text says.
Taxability in the year of accrual means the interest goes into that year's return even though nothing was received or compounded on that date.
The circular states the Board's view; it prescribes no method of computing the interest and gives no relief for tax paid on a receipt basis in another year.
No deduction, exemption or rate question is dealt with here — only the year of taxability.

Where you meet it

In an assessment for assessment year 1985-86 where National Deposit Scheme interest is added on accrual though not yet drawn.

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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.