Taxation of Bank FDR, KVP & NPS – Tier II Account: An overview


Taxation of Bank FDR, KVP & NPS Tier II Account: An overview




[Query 1]

  1. I didn’t receive any interest in FY 2023-24 in bank A/c from my FDR which is kept for a period of 37 Months. Only one FDR has matured in the year and that too was renewed without crediting it in my account. The first 9 months interest is reflected in my Form No. 26AS and for the balance of 3 months, I am sure that it will be reflected by next month. Whether interest income on bank FDR will be taxable in the FY 2023-24 though I have not received it. If yes, it will add a financial burden of tax on me without actual receipt of income in my hand. Can it be deferred till maturity? If it can be deferred, the bank can change the entry in their record so that Form No. 26AS also gets altered? Also guide whether the bank is right in doing TDS now or it can be optional till maturity?  [Kamb******]
  2. Please guide how interest on Kisan Vikas Patra (KVP) should be shown in Income Tax Return (ITR). Whether it has to be offered for taxation on yearly basis or on maturity? [Bharat Gupta-]


Taxation of Interest on Bank FDR:

  1. Your question is regarding the year of taxation of interest on Bank FDR/other investment with a maturity period spread over more than one financial year. Whether interest is taxable on receipt basis or on due / accrual basis?
  2. Interest on the Bank FDR may be chargeable to tax either under the head “Income from Business or Profession” or “Income from Other Source”. For salaried and other taxpayers who are not in business, the interest income would obviously be taxable under the head “Income from Other Source”.
  3. The Income Tax Act provides that any income liable for taxation under the head “Income from Business or Profession” or “Income from Other Source” shall be charged to tax in accordance with the method of accounting regularly employed by the taxpayers. As such, the taxpayers have an option to offer Interest income for taxation in the following mode:
    (i) On accrual (due) basis i.e., year on year basis (it is known as mercantile system of accounting) or
    (ii) at the time of maturity of the FDR only (it is known as cash system of accounting).
  4. The option of choosing the method of accounting/recording the transaction in the books for taxation is freely available with the taxpayers. However, once taxpayers adopt any particular method, it should be consistently & regularly employed.Irrespective of the method of accounting followed by the depositor/ investor, the liability to do TDS triggers in the hands of the bank (i.e., payer) at the time of payment or credit in its books of accounts, whichever is earlier. In short, the bank is duty bound to do the TDS on an accrual basis. Whether a depositor offers the interest on maturity on accrual basis, TDS will be done and reflected on accrual basis in Annual Tax Statement (i.e., Form No. 26AS) of the depositor. Bank is right in doing TDS on interest on an accrual basis even if not paid/credited to your account during the year.
  5. As far as renewal of bank FDR is concerned, it is normally presumed that the interest has been paid by the bank and the renewal tantamount to investment (or say reinvestment) of the interest amount back by the depositor. As such, the renewal of FDR may not help the depositor in deferring the taxation and it will be taxable even if the taxpayer is opting for the cash system of accounting.
  6. In my personal opinion, following mercantile system of accounting would be easier & better as it will avoid the complications of reconciliation, TDS credit and would result in even distribution of income over different years. It may also result in avoidance of unwanted notices from the income tax department as TDS entries would be reflected in AIS/26AS on an accrual basis.

Taxation of Interest on KVP:

  1. TDS is not applicable on payment of interest or maturity proceeds of Kisan Vikas Patra (KVP).
  2.  Interest on KVP can be offered for taxation in the same way and mode as interest on bank FDR as discussed hereinabove.

[Query 2]

Please guide how withdrawal from NPS – Tier -2 Account is taxed?  [N C Gupta  –]



  1. NPS Tier-II offers flexible withdrawals, unlike Tier-I, where the money is locked until the date of vesting i.e., till the date the account holder turns 60.
  2. There is no clarity on how gains made on the transfer/sale of NPS Tier-II units will be taxed. Few are of the opinion that any gains from NPS Tier –II made should be included under the head “’Income from Other Sources” & taxed at the applicable slab rate (like interest on Bank FDR). Others are of the opinion that the tax treatment for NPS Tier-II gains should be similar to that of debt mutual funds.
  3. Taxpayers may note that the tax treatment of debt mutual funds has been changed by the FA-2023 & indexation benefit is no longer available to the debt mutual fund. As a result, the implications of taking either path (capital gains or interest income treatment) will yield the same result – the gains will be added to the taxable income of the taxpayers & will be taxable as per the applicable tax slab for all investment done on or after 01.04.2023.
  4. As far as investment done prior to 01.04.2023, the issue would remain controversial in absence of any clarification by CBDT. I am of the strong view that NPS investment would be a capital asset & so the resultant gains on withdrawal (redemption) should be treated as capital gains. NPS Tier-II gains cannot be treated at par with equity mutual funds as these are exempt from Securities Transaction Tax (STT). As a result, it would be taxable like any other debt fund i.e., LTCG (investment held for more than three years) at redemption will attract tax @20% with indexation. If the holding period is shorter, then the gains will be added to other regular taxable income of the taxpayers and taxed as per the slab rate applicable.

[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at Other articles & response to queries are available at]

CA Naresh Jakhotia
Partner – M/s. SSRPN & Co.
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