Tax on Interest Income – Saving Account, PPF, Fixed Deposits, bonds, R/D
In India, around 90 percent incomes are taxed under Income Tax Act, 1961. In that category, interest income is also taxable under Income Tax. Although, Income Tax Act also provides some basic deduction related to interest income received. Any interest income earned or received from savings and investments like savings account, fixed deposits, post office schemes, recurring deposits, etc, are subject to Income Tax.
However, many taxpayers are not sure about how the tax treatment is there on the interest incomes. This article covers the important information regarding taxability of interest income received in India by Residents.
Under which head interest income is shown?
Where assessee is in the business of money lending and investment, then interest is taxable under the head profit and gain from business and Profession. However, when assessee doesn’t have money lending and investment business as full time business, then interest will be taxable under the head Income from other sources.
Different types of interest income and their tax liability
1. Savings account:
Interest received on a savings account is taxable in the hands of investor. Nevertheless, under section 80TTA, deduction is also allowed on interest from savings account upto Rs 10,000 per year. This deduction is available only to non-senior citizen individuals and Hindu Undivided Family (HUF).
As per section 80TTA of the Income Tax Act, interest received from all the saving accounts will be exempt from tax up to Rs 10,000. This limit includes the amount received form all savings accounts with banks, co-operative banks, and post offices. If the interest earned from these sources exceeds Rs 10,000, the additional amount will be taxable.
For example, Mr. BabaTax, a 35 years man, receives total Rs 15,000 interest from its all savings account. He can claim deduction upto maximum of Rs. 10,000. Therefore, Rs. 5,000 will be taxable.
2. Fixed Deposit
Interest earned from fixed deposits is also taxed under Income tax. Interest on fixed deposit is fully taxable at income tax slab rates applicable to the taxpayer. Here, No separate deduction is available for non-senior citizen individuals and HUFs.
However, as per section 80TTB for senior citizen (age 60 or above), the deduction is allowed up to Rs 50,000. That means interest earned by senior citizens up to Rs 50,000 will be exempt from tax, and additional amount exceeding 50,000 will be taxable.
Under section 80TTB, deduction for senior citizens includes-
- Interest on saving bank or fixed deposits
- Interest on deposits held in a co-operative society engaged in banking business, including a co-operative land mortgage bank or a co-operative land development bank; or
- Interest on post office deposits
Nevertheless, if income exceeds the threshold limit, Tax deducted at source (TDS) is liable to be deducted for such interest income.
TDS rates on Fixed Deposits
|Interest received by residents individual||10%, if interest income exceeds Rs. 5,000|
|In case of absence of pan card or invalid pan card||20%, if interest income exceeds Rs. 5,000|
|Non resident of India||30%|
To avail exemption from TDS, you need to file Form 15G and 15H for senior citizens, if the overall taxable income of the person is below the exemption limit.
3. Recurring Deposits (R/D)
On receiving an interest income from recurring deposits will attract 10% TDS. Now, investors have a option either to reinvest the interest earned from recurring deposits or can withdraw the amount of interest earned on R/D. However Income Tax Act doesn’t provide any deduction on interest on R/D. Also, it is not covered section 80TTA.
TDS rates on Fixed Deposits:
|Interest received by residents individual||10%, if interest income exceeds Rs. 10,000|
|In case of absence of pan card or invalid pan card||20%, if interest income exceeds Rs. 10,000|
|Non resident of India||30%|
The bonds issued by private or public corporations, corporate bonds are debt securities. The interest earned on these bonds are taxable. However, tax-free bonds are beneficial for the purpose of investment option for investors as the interest earned on approved bonds is exempt u/s 10 (15) (iv) (h) of the Income-tax Act, 1961.
5. Public Provident Fund (PPF)
PPF falls under the Exempt-Exempt-Exempt (EEE) category and the interest earned from PPF is fully exempted from tax without any limits. Also, every month the interest received is compounded annually in PPF. Both the interest earned as well as the withdrawals from PPF are tax-free. At the time of investment in PPF, one can claim deduction under section 80C of Income Tax Act, 1961
For any questions, you may reach us at Discussion Forum
The author of above article is Shruti Jain.
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