For a taxpayer, who has exhausted the 80C limit, the accrued interest will be added to “Income from other Sources”, but he/she will get no deduction for the same u/s 80C, resulting into higher taxable income.

At the time of e-filing of his Income Tax Return (ITR) for the Assessment Year (AY) 2019-20, Samar Sen (name changed) found that he has to pay additional tax of over Rs 9,000 in addition to the tax deducted at source (TDS) from his salary by his employer. While the Form 16 revealed that the tax calculated on the basis of his annual salary was accurate, and Form 26AS showed that the TDS amount was also deposited to the Income Tax (I-T) Department, the additional tax payable resulted from some investments which were unsuitable or improper for him.

First of all, he had some fixed deposits in banks (Bank FDs), interest on which was taxable. With Sen already in the 20 per cent tax bracket and nearing the 30 per cent mark, the Bank FDs would only increase his tax liabilities further. To avoid this, he should move his money from Bank FDs to short-term debt mutual funds (MFs) like overnight funds or liquid funds or ultra short-term funds.

The second investment that was creating additional tax liabilities was actually a tax-saving investment that was not suitable for him. As he finds it convenient with the home service by a postal agent, he often invests in National Savings Certificates (NSC), the interest on which is taxable on accrual basis. Although NSC is a quite good tax-saving investment, but it is suitable for those investors who need small investments to save their tax. It is because the accrued interest on NSCs is considered as income from other sources and at the same time treated as the amount reinvested and is eligible for tax deduction u/s 80C of the Income Tax Act.

So, a taxpayer, who has not exhausted the 80C limit, may get the benefit of deduction on the accrued interest, as the deduction would nullify the effect of increase in “Income from other Sources”. However, for a taxpayer, who has exhausted the 80C limit, the accrued interest will be added to “Income from other Sources”, but he/she will get no deduction for the same u/s 80C, resulting into higher taxable income.

As he as already exhausted the 80C limit, investing in NSC, and that too Rs 1,50,000 in a financial year, is an improper investment for Sen. If the interest on NSC is considered as 8 per cent, it will put additional burden of Rs 12,000 on the taxable income in the first year, if the investment is made on April 1. In case the same investment pattern continues, the additional burden on taxable income would increase to Rs 1,87,746 in the 10th year and Sen would end up paying additional tax of Rs 56,324, excluding cess, assuming that he will be in the 30 per cent tax bracket then.

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So, instead of NSC, investing in an exempt, exempt, exempt (EEE) category of investment like Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), Unit-Linked Insurance Plan (ULIP) or even endowment plans would be more suitable for him. Even after LTCG becomes taxable, Equity-Linked Savings Scheme (ELSS) would also be more suitable for Sen than NSC.

When asked, why he is not investing in PPF instead of NSC, Sen said, “I opened a PPF account in a Post Office, which is not very near to my house, about 20 years back. Not only going there is an issue, but the systems there mostly remained down and I need to stand in long ques as, like others, I also go there in the pick investment time after getting reminder from the accounts department to submit investment proof. As a result, I had to return without depositing money/cheque many times. So, I find it convenient to put money in NSC, as the postal agent gives me home service.”

“Earlier, I used to put money in PPF only through a postal agent, but I am unable to get the service anymore after commission on PPF has been scrapped,” he added.