I have a 5-year cumulative FD, do I need to pay income tax on interest annually or at maturity?

I have a 5-year cumulative fixed deposit where the interest is payable only at maturity. For the purpose of filing my income tax return, should I report the accrued interest every year, even though it is not actually received, or should I declare the entire interest income in the year of maturity?

As per Section 145 of the Income Tax Act, 1961, an assessee may follow either the cash system or the mercantile system of accounting for computing income under the head “Income from Other Sources,” provided the method is applied consistently. However, in the case of a cumulative fixed deposit (FD), although the interest is payable only at maturity, it accrues annually and is reinvested, increasing the principal amount. Consequently, for tax purposes, the interest is deemed to accrue each year and becomes taxable on an annual basis. Notably, banks generally follow the accrual method and report interest annually. As a result, the taxpayer’s Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) may reflect accrued interest, and Form 26AS may reflect tax deducted at source (TDS) under Section 194A. If the taxpayer follows the cash system and reports the entire interest only at maturity, this can lead to mismatches between AIS/TIS/26AS and the ITR. While both cash and accrual methods are legally permissible, it is generally advisable that you report FD interest on an accrual basis. This ensures alignment with bank reporting, and helps avoid unnecessary compliance issues.

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I had purchased GOI Savings Bonds issued by the RBI in 2018. These bonds carried a fixed interest rate of 7.75% per annum. I reported accrued interest yearly in my ITRs using the accrual method, though it never appeared in Form 26AS. The bonds matured in May 2025, and RBI deducted TDS on the full 7-year interest, making it appear as income for one year. Without documents to show yearly accruals, how can I explain this to the tax authorities?

Amit Maheshwari, Tax Partner, AKM Global: In your case, a discrepancy arises with your past Income Tax returns where this income was earlier offered to tax on accrual basis. Claiming the full TDS credit in 2025-26 without reporting the corresponding income in the same year could result in your return being flagged as defective or trigger tax scrutiny. To address this issue and prevent potential double taxation, the Central Board of Direct Taxes (CBDT) has provided remedy through Form 71. This form allows a taxpayer to align the credit for TDS with the respective assessment years in which the corresponding income was offered to
tax. You must file Form 71 electronically via the Income Tax portal within two years from the end of the financial year in which the TDS was deducted before the Jurisdictional Assessing Officer (JAO). It is imperative to proactively compile supporting documentation to substantiate your position. This should include a detailed year-wise working sheet of the accrued interest offered to tax, along with copies of the relevant ITR acknowledgments.

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