Usually, the interest earned from a bank FD is taxable every year irrespective of whether it is credited into the savings account concerned or not. This is especially true in case of cumulative bank FDs. Under such FDs, the interest is paid to the depositor at the end of the maturity period, but the interest accrued is taxed every year.
Do note that this can change depending on the taxation method followed by the individual. Mayur Shah, Tax Partner-People Advisory Services, EY, says, "The taxation of interest on bank fixed deposits will depend on the method of accounting (cash or accrued) followed by the taxpayer. However, practically, banks may deduct taxes at source from such interest every year."However, the same cannot be said for debt mutual funds. Suresh Surana, Founder, RSM India - a tax advisory and business consulting firm - says, "The tax incidence on debt mutual funds will only occur when they are redeemed or transferred to a different mutual fund scheme. Hence, no tax will be payable during the holding period of debt mutual funds." One can say that in debt mutual funds, the tax payable is deferred to a later date, he adds.Hence, an individual can avoid paying taxes till the debt mutual funds (MFs) are actually redeemed or switched to a different mutual fund scheme.Setting-off debt mutual funds gain with lossesIf there is capital loss from debt mutual funds: The capital loss arising from debt mutual funds will be termed as short-term capital loss. Shah says, "Short-term capital loss from debt mutual funds is eligible to be set off against any LTCG or STCG arising during the same financial year in which the loss has occurred."
Say you have a capital loss of Rs 30,000 from debt mutual funds. Also, you have long-term capital gains of Rs 80,000 (after subtracting exempted Rs 1 lakh) from equity shares. By subtracting short-term capital loss from long-term capital gains, one's taxable income under the head "Income from capital gains" would be reduced. Going by this example, an individual will be liable to pay tax on Rs 50,000 (Rs 80,000 minus Rs 30,000) at the income tax rates applicable to such income.There may be cases where loss from debt mutual funds is higher than the total capital gains (both short and long term). In such cases, the individual is allowed to carry forward the capital losses. Surana says, "Income tax laws allow an individual to carry forward the short-term capital loss for a maximum of seven assessment years (eight financial years) if the loss amount cannot be entirely set off in one financial year. This carried forward short-term capital loss from debt mutual funds can be set off against both short- and long-term capital gains arising from any asset in future financial years."If there is a capital gain from debt mutual funds: If there is a short-term capital gain from debt mutual funds, then such capital gains can be used to set off losses arising from other assets. Surana says, "Only short-term capital losses from other assets can be set off against short-term capital gains from debt mutual funds. In other words, if you have long-term capital losses from other assets, such losses cannot be set off against the short-term capital gains arising from debt mutual funds." Long-term capital losses can be set off against long-term capital gains.
(Your legal guide on estate planning, inheritance, will and more.)
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