When dealing with your taxes, it’s crucial to understand Section 145(1) of the Income Tax Act, which outlines how income should be computed using either the cash or mercantile basis. This computation should align with the method regularly used by the taxpayer for calculating ‘Profits and Gains from Business and Profession’ and ‘Income from Other Sources’.
Scenario: Fixed Deposits (FDs) in Two Banks
Let’s consider a scenario where you have Fixed Deposits (FDs) in two different banks:
– Bank A: Tax Deducted at Source (TDS) is deducted for the accrued interest.
– Bank B: No tax deduction is made because the interest is below ₹40,000.
– Additionally, you have capital gains tax to report in your Income Tax Return (ITR).
Excluding FD Accrued Interest from this year’s ITR
If you want to exclude the FD accrued interest in this year’s ITR, you can choose the cash method of accounting. You’ll only report the interest when it’s received, not accrued.
Claiming TDS Credit in next year’s ITR
Regarding the TDS credit, you can claim it in next year’s ITR when you report the accrued interest on a receipt basis. Ensure that the TDS credit accrued for the said year is carried forward to set off in the year you report the interest.
Indicating Cash Method in ITR
When filing your ITR, select the cash method of accounting in the Part A – Other Information section to indicate that you’re following the cash accounting system.
Calculating Tax Liability
To accurately determine your tax obligations, it is essential to take into account:
– Accrued interest from FDs (exclude if following the cash method)
– Capital gains tax
– Other income sources
– Deductions and exemptions
Consistency in Accounting Method
It’s essential to consistently follow the chosen accounting method (cash or mercantile) for all income to avoid potential issues with tax authorities.
Consult a Tax Professional
Consult a tax professional or utilize tax calculation tools for precise tax liability calculations. Remember that personalised advice can be obtained from a tax professional or the Income Tax Department.
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