Accrual vs receipt: How to disclose NSC, KVP and RD interest incomes in ITRs

Declaration interest income on Post Office Schemes

Taxpayers are often confused in reporting interest income arising from National Small Savings Schemes (NSSS) offered by the department of posts. The confusion is around declaring the interest income — whether it should be done annually on an accrual basis or only at maturity.

The tax treatment may appear technical but the choice can make a significant difference to overall liability and avoid an income-tax notice.

A major change this year offers some clarity. From this fiscal, the department of posts has started pushing interest on National Savings Certificates (NSC) to the annual information statement (AIS) on an accrual basis. This means the interest is now reflected year by year instead as a single lump sum in the year of maturity.

“For NSC holders, this is a welcome development,” said Himank Singla, Partner, SBHS & Associates. “Taxpayers can now rely on the AIS to declare interest annually, which reduces the risk of under-reporting and ensures smoother cash flows.”

The benefit is not just about better compliance. NSC interest is deemed reinvested until maturity, which means it qualifies for deduction under Section 80C except in the final year.

Claim deduction

“By showing the accrued interest every year, taxpayers can legitimately claim 80C deduction in the interim years. This optimises the tax outgo, something that was not always possible earlier when people declared the entire interest only at maturity,” Singla said. The change, therefore, not only eases reporting but also lowers the effective tax cost for investors.

Kisan Vikas Patra (KVP) and Post Office Recurring Deposits (RD), however are different. For these schemes, interest continues to be reported in AIS only at maturity as a consolidated figure. Historically, since year-wise accruals were not displayed in AIS, many tax practitioners hesitated to ask clients to declare it annually, and most taxpayers themselves did not bother to self-declare. As a result, income tends to get bunched in the maturity year.

This bunching can be problematic. Suppose a five-year KVP generates total interest of Rs 3 lakh. If the taxpayer follows AIS, the entire Rs 3 lakh will be offered to tax in the maturity year instead of Rs 60,000 every year. “This can push an assessee into a higher slab rate or even trigger surcharge thresholds in that year,” warns Singla. “It can also lead to shortfall in advance tax, inviting interest under sections 234B and 234C. On top of that, it may cause mismatches between AIS and ITR, resulting in automated nudges or adjustments,” Singla said.

The correct approach is to compute interest on an accrual basis and disclose it annually in the ITR under the “Income from Other Sources” head, he said.

Taxpayers should maintain a year-wise working that separates principal and interest and then use the AIS “Feedback” option at maturity to mark the entry as partially or wholly incorrect, noting that the income has already been reported across years. “This is the only way to avoid a sudden tax spike at maturity and keep the ITR consistent with legal requirements,” Singla said.

The tax department is moving steadily toward greater transparency and accuracy in information reporting. NSC has already shifted to accrual basis in SFT, and over time, KVP and RD may also follow. Until that happens, the onus lies on investors to do the right thing, even if AIS is lagging.

“NSC investors have it easier now thanks to cleaner visibility in AIS,” Singla said. “But those with KVP or RD need to be more disciplined. If you don’t declare annually, you are setting yourself up for a painful tax shock at maturity.”

Declaring interest annually may feel like extra work but it pays off in the long run by reducing risks, smoothing liability and keeping your filings trouble-free.