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I gifted my sister 10 lakh in 2017 who is living with her daughter after she lost her husband. I gifted the amount to support her for a situation where something unexpected happens to me. She invested that money in Kisan Vikas Patra based on my suggestion in 2017. As this KVP is expected to mature in 2027, will this attract 30% tax in the year 2027 considering the current tax rate remains? She doesn't have any other income and has ni filed an IT return till date. - Name withheld 

Answered by Shailesh Kumar, Partner, Nangia & Co LLP. 

The Income Tax Act provides for taxation of income from other sources (like interest) either on cash or accrual basis at the option of the taxpayer. If the taxpayer opts for taxation on ‘cash basis’, interest from Kisan Vikas Patra (KVP) may be taxed in the year of its maturity at the slab rates that are applicable in that year for an individual. Accordingly, interest from KVP shall be taxed in the hands of your sister in 2027 as per the then existing slab rates.

No tax will be deducted from this maturity proceeds and entire tax on such interest will have to be paid by your sister on advance tax/ self-assessment tax basis. Your sister may opt for the old tax regime or new tax regime, as may be applicable and more beneficial for her during that year.

On the other hand, taxpayer may also choose to pay tax on such accrued interest on yearly basis to evenly distribute the tax liability during the tenure of the instrument and to take benefit of slab rates every year.

(Send your queries at mintmoney@livemint.com)

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