KVP maturity and tax: Should interest be taxed in one year or spread over time?

How is KVP taxed at maturity?

• KVP interest can be taxed yearly or at maturity.
• If not reported yearly, entire interest must be taxed in the year of maturity
• Consistent tax method must be followed unless there are valid reasons to change

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Interest earned on small savings schemes like Kisan Vikas Patra can sometimes lead to tax confusion at maturity, especially when the entire interest is reflected in a single year. Today's Ask Wallet Wise query decodes whether tax must be paid on the full interest amount in the year of maturity or if it can be linked to the years over which it was actually earned.

Ask Wallet-Wise initiative offers expert advice on matters related to personal finance and money-related queries. You can email your queries to askwalletwise@nw18.com, and we will try and get a top financial expert to address.

My KVP matured this year. Against an investment of Rs 5 lakh, I have received Rs 10 lakh. The postal department has reported the difference of Rs 5 lakh as interest income for the current year, on which I am required to pay tax, even though this income was earned over the last eight years and four months. How can this issue be resolved? Kindly advise.

Expert's Advice: With respect to income taxable under the head “Income from Business or Profession” or “Income from Other Sources,” including interest income, tax laws allow taxpayers to offer income either on an accrual basis or on a receipt basis.

For one source of income under the same head, you may follow the accrual basis, while for another, you may offer income on a receipt basis. However, once a method is chosen, it must be followed consistently year after year unless there are compelling reasons to change it.

In the case of interest on KVP, you had the option to offer the interest income every year on an accrual basis, which would have avoided this situation. If you have already offered the interest income on an accrual basis in earlier years, you need to include only the interest income attributable to the current year in your Income Tax Return (ITR).

If you receive a notice from the income tax department due to a mismatch between the income reported by you and that reflected in their records, you can respond by stating that the interest income has been offered on an accrual basis in earlier years and that only the current year’s interest is taxable.

However, if you have not offered the interest income for taxation in the earlier years, you have no option but to include the entire difference of Rs 5 lakh in the ITR for the current year and pay tax accordingly. Without having reported the income in the past, it cannot now be claimed that the interest income relates to the previous eight years and four months.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decision.