Interest-bearing investments such as savings accounts, fixed deposits, and recurring deposits are go-to options for risk-averse investors. Just like any other income, interest income also attracts income tax. Interest income from these investments is taxable as income from other sources. Let’s take a look at some of the most popular interest-bearing investments and how they are taxed in India-
Taxability on Saving Bank Interest
Each quarter, the bank adds interest to your savings account, which is treated as taxable income under the head “IFOS.” Further, It is essential to disclose this accumulated interest in your income tax return. The various other points regarding taxability on savings bank interest are as follows:
- As per Section 194A of the I.T. Act, TDS is not required to be deducted from interest on a savings account.
- For NRIs, tax is deducted at 30% on interest on Non-Resident ordinary accounts(NRO). Further, no tax applies to interest on Non-resident External (NRE) accounts.
- Savings interest income of up to INR 10,000 in a financial year is eligible for tax deduction u/s 80TTA of the IT Act. However, It is available to individuals and HUFs other than senior citizens. Section 80TTB is applicable in the case of a senior citizen.
Tax on Fixed Deposit Interest
Fixed deposits have been a popular investment option for many investors, it allows you to exploit the complete potential of Section 80C to deduct ₹1.5 lakh from your taxable income. However, interest received on FD is taxable and chargeable under the head ‘Income from Other Sources‘. The various other points regarding taxability on fixed deposit interest are as follows:
- FD interest is taxable at the slab rates applicable to each taxpayer.
- For NRIs, tax is deducted at 30% on interest on Non-Resident ordinary accounts(NRO). No tax applies to interest on Non-resident External (NRE) accounts.
- TDS is deducted u/s 194A by the bank at the time they credit the interest to your account, and not when the FD matures.
- The TDS is deducted at the rate of 10% only if the amount of interest income from deposits held in all the bank branches put together is more than Rs.40,000 in a year.
- The TDS Deduction will be at the rate of 20% if you don’t provide your PAN to the particular bank. So make sure that the bank has your PAN details.
- However, if your income is below the exempted limit, you can file Form 15G/15H to avoid TDS. Form 15H is for senior citizens and 15G is for those other than senior citizens. Submit these forms at the beginning of each financial year to avoid additional TDS deductions.
How tax on FD interest is calculated?
Many taxpayers received email from the Income Tax Department about discrepancies in interest income between AIS and filed tax returns. To prevent such notices, include your interest income in total income and calculate tax liability accordingly. You can follow the below-mentioned steps to calculate tax liability on interest on FD to your ITR:
- Add the interest income under the head Income From Other Sources.
- See which tax slab rate you fall into.
- Match it with the yearly TDS deduction in your Form 26AS.
- The bank does not deduct TDS for annual FD interest below INR 40,000
- The Income Tax Department will adjust the TDS (which has already been deducted) against your final tax liability.
- Even when no TDS is deducted include the interest income in your total income and pay tax on it.
If you choose to receive the interest from your fixed deposit at maturity, the total interest income accrued could potentially elevate you into a higher tax bracket, resulting in increased tax payments.
Let’s take an example:
Anish has 2 FDs with a bank of INR 2,00,000 each for a period of 5 years at 8% interest per annum. In the first year, Anish’s interest income is INR 16,000 from each of the FDs, total interest accrued is INR 32,000 in the first year. The bank does not deduct TDS for annual FD interest below INR 40,000.
Another Example: Arjun has a FD of INR 10 lakh with the Bank at an interest rate of 7% p.a. He receives an annual interest of INR 70,000. The bank will deduct TDS at the rate of 10% on the whole amount of INR 70,000.
Interest Income of Senior Citizens
Senior citizens receiving interest income from FDs, savings accounts, and recurring deposits can claim a deduction of up to ₹50,000 annually under Section 80TTB. If the senior citizen’s interest income from all FDs with a bank is less than ₹50,000 in a year, the bank is not required to deduct any TDS.
If you have deposited your money under the traditional scheme, the interest is credited to the given Savings Account on a monthly or quarterly basis.
If you have opted for the reinvestment scheme, a compounded interest is added to the principal amount every quarter and this is reinvested.
You can choose to receive the interest amount on a monthly, quarterly, or annual basis.
If an individual opts for the old/existing tax regime, then under Section 80C of the Income-tax Act, you can claim a deduction for investments up to INR 1.5 lakh in a financial year by investing in tax-saving fixed deposits (FDs)
Yes, but the collective limit is INR 10,000
Individuals can claim income tax deductions of up to INR 1.5 lakh under Section 80C of the Income-tax Act, 1961. However, interest earned on this tax saving FD is taxable except when specifically exempted.