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Feb 18, 2012, 02.08 PM IST | Source: Moneycontrol.com

How to handle: Income not received but still a tax problem

There are two aspects of taxation and the first part is determining whether the income that is earned by a person is taxable or not. The second part is a bit tougher as it involves looking at the manner in which the taxation calculation will be carried out.

How to handle: Income not received but still a tax problem
Arnav Pandya

There are two aspects of taxation and the first part is determining whether the income that is earned by a person is taxable or not. The second part is a bit tougher as it involves looking at the manner in which the taxation calculation will be carried out. Take the case of several types of income that are actually earned but they are not received immediately by the individual.

This happens due to the fact that the amount is paid out at the time of the closure of the investment or it is reinvested due to the feature of compounding. This creates a bit of confusion about the manner of taxation of the income and here are the details of how this should be handled.

Type of accounting

One of the important things that is to be seen in this type of situation where income has been earned but this has not been received yet is the manner of accounting that is adopted by the individual. In most cases it is the accrual way of accounting that is adopted so in such a situation the income that has been earned has to be accounted for even though it has not been received.

This is different from a situation where the cash accounting system is used where only the amounts that have been received are accounted for. The accrual method will also be in tune with what is adopted by the banks and other institutions so it will also ensure that the details tally.

Estimating the income

In the case of several investments the process starts with the actual estimation of the income for the financial year. This represents the income that has been earned but has not been received. This is not a very difficult task and in some cases it is already being done by the institution that has issued the specific investment so the individual need not do this process once again.

Take the case of a bank fixed deposit where the deposit is put on September 1 for a period of 1 year with the interest to be paid on maturity. Here interest is to be considered for the part of the year even though it will be paid only sometime in the next financial year. If there is a tax deduction at source that is to be done then the bank will do this on the estimated income for the year and the figure that the individual has to take into their accounting will have to match with this but the good news is that the bank will give an interest certificate so there is not much additional work that has to be done. The tax deducted at source certificate will also help in getting the income and the tax deducted figure.

When the investment is in an instrument like a National Savings Certificate (NSC) where the income is earned but this is not received till the end of the instrument the situation is different. Here there is no tax deducted on the income so the same kind of help as seen earlier is not available. However this does not make the job of the individual any more complicated because there can still be a situation where they can make an estimate about the whole position. There are ready made tables available which estimate the income for each year of the NSC investment and hence this will give the required amount to the individual.

Final receipt

When this particular action is followed then the situation becomes easier for the individual because there will be a spread out of the income that is earned each year without any bunching up of the amounts. On the other hand when the amount is received in a lump sum there is no big worry about a large tax payment due to the fact that the tax liability has already been paid in parts over a period of time. At the time of maturity of the investment only the income of the last year will have to be taken into the calculations. 

Arnav Pandya can be contacted at arnavpandya@hotmail.com

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