FDR Interest Eligible for 80P Deduction A Win for Co-op Societies
In a major relief to cooperative societies, the Income Tax Appellate Tribunal (ITAT) recently ruled that interest earned on Fixed Deposit Receipts (FDRs) is eligible for deduction under Section 80P of the Income-tax Act, 1961. The verdict granted a tax relief of ₹10.14 lakh to a registered co-operative credit society.
This blog simplifies the legal and tax implications of this case and helps you understand how your society can benefit from similar provisions.
What is Section 80P of the Income-tax Act?
Section 80P allows co-operative societies to claim deductions on their income, provided the income is attributable to their business operations, especially in the area of credit facilities or supply of agricultural inputs.
Key Provisions under Section 80P:
- 80P(2)(a)(i): Deduction for income from banking or credit facility to members
- 80P(2)(d): Deduction for interest/dividends from other co-operative societies
- Not applicable to co-operative banks post Finance Act, 2006 (clarified in various case laws)
ITAT Ruling: Case Snapshot
- Case Title: M/s. Railway Employees Co-operative Credit Society Ltd. vs ITO
- Forum: ITAT Chennai Bench
- Assessment Year: 2018–19
- Relief Granted: ₹10.14 lakh
- Issue: Whether interest income from FDRs with nationalized banks is eligible for 80P deduction
ITAT’s Reasoning Behind the Decision
- The co-operative society had parked surplus funds in FDRs with Indian Bank and State Bank of India.
- The Assessing Officer had disallowed the interest earned, treating it as “income from other sources” under Section 56.
- ITAT disagreed and held that:
- Surplus was temporary and parked in banks for safe keeping.
- Funds were integral to the business activity of the society.
- There was no intention of earning passive income.
- Therefore, interest earned was “attributable” to society’s business, qualifying under Section 80P(2)(a)(i).
🔍 Legal Angle: The decision relied on earlier judgments like Totgars Co-op Sale Society Ltd. vs. ITO (SC), but clarified its applicability in context — especially when funds are part of business operations, not surplus investments.
Practical Impact: What Co-op Societies Should Know
Eligible
Interest from FDRs may qualify for 80P deduction if:
- Funds are business-linked (not idle or unrelated)
- Deposits are short-term and safety-oriented
- FDRs are with banks due to statutory or operational requirements
Not Eligible
When:
- Income is from excess reserves not needed for operations
- Investments are unrelated to core activity
- Society acts like a passive investor
| Nature of Deposit | Eligible for 80P? |
|---|---|
| Surplus parked temporarily in FDRs | ✅ Yes |
| Long-term investment for returns | ❌ No |
| FDRs from co-operative banks | ✅ Yes (under 80P(2)(d)) |
| FDRs from nationalized banks | ✅ Conditionally |
Expert View: Keep Documentation Clear
“To safely claim 80P on FDR interest, co-op societies must justify the business necessity behind the deposits. Maintain board resolutions, cash flow plans, and fund utilization records,” says CA Mohan Krishnan, senior tax advisor.
Frequently Asked Questions (FAQ)
Q1: Is interest from FDs always eligible for 80P deduction?
A: No. It depends on whether the FDs are linked to core business operations or are idle surplus investments.
Q2: Can co-operative banks claim 80P on interest income?
A: No. After Finance Act, 2006, co-operative banks are excluded from 80P(2)(a)(i) benefits.
Q3: How should a society structure its deposits to stay compliant?
A: Ensure FDRs are used for short-term safety, not profit-making, and document intent clearly.
Summary
FDR interest is eligible for Section 80P deduction, rules ITAT, granting ₹10.14L relief to a co-op society. Temporary surplus deposits, when linked to core operations, can claim this benefit—subject to proper documentation and intent.
Final Takeaway
This ruling brings much-needed clarity to thousands of co-operative societies on how to manage surplus funds without losing tax benefits. If your society is unsure about claiming Section 80P deductions, it’s time to consult professionals.