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Income Tax on Interest Income

author portrait

Divya Singhvi

Fixed Deposit
Income from Other Sources
Income Interest
Income Tax
Last updated on August 31st, 2021

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. Lets take a look at some of the most popular interest-bearing investments and how they are taxed in India-

Savings Bank Account – Interest Income

Every quarter bank credits interest to your savings account. Interest that gets accumulated in your savings bank account is considered as your taxable income under the head “Income From Other Source.” And it must be declared in your tax return. Saving account interest is taxable at your slab rate. Do note that bank does not deduct TDS on savings bank interest. While incomes from the fixed deposit and recurring deposit are taxable, interest from the savings bank account and post office deposits are tax-deductible to a certain extent.

How is savings interest taxable?

Deduction Under Section 80TTA

Section 80TTA of the Income Tax Act was introduced in order to allow a deduction of up to INR 10,000 on savings interest. 80TTA deduction was introduced to encourage taxpayers to generate more savings. It is available to individuals and HUFs other than senior citizens.  Section 80TTB is applicable in the case of a senior citizen.

If interest income from all the saving accounts is less then INR 10,000 then the entire amount is deductible. If total interest from saving accounts exceeds INR 10,000 then the maximum of INR 10,000 will be deductible and the remaining amount will be taxable

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FD Interest Income

Fixed deposits have been a popular investment option for many investors, it allows you to exploit complete potential of Section 80C to deduct ₹1.5 lakh from your taxable income. However, interest received on FD is taxable. Income tax on interest on fixed deposit is chargeable under the head ‘Income from Other Sources‘. Hence, the income is added to the total income of the taxpayer.

How is Interest Income from Fixed Deposit Taxable?

Interest received from Fixed Deposits is fully taxable and the tax liability is as per the income tax slab. Add it to your total income under the head ‘Income from Other Sources’ in your Income Tax Return. Tax is Deducted at Source by the bank at the time they credit the interest to your account, and not when the FD matures. You will receive the amount net of tax. You then have to add the gross amount to your income and adjust TDS against your final tax liability.

How income tax on interest on Fixed Deposit is calculated?

Many taxpayers got messages and emails from Income Tax Department regarding a mismatch in the interest income data available with the tax department and what was shown in the Income Tax Return (ITR) filed by taxpayers. Therefore you need to add your interest income to your total income and calculate your tax liability accordingly to avoid any such notices. You can follow the following steps to calculate tax liability on interest on FD to your ITR:

Suppose you wait until the maturity of your FD when interest is actually received– your total interest income may push you up to a slab and you may end up paying the higher tax.

Let us understand this by way of an example:

Anish falls in the 20% tax bracket. He has 2 FDs with a bank of INR 1,00,000 each for a period of 3 years at 8% interest per annum. In the first year, Anish’s interest income is INR 8,000 from each of the FDs, total interest accrued is INR 16,000 in the first year. Bank does not deduct TDS for annual FD interest below INR 40,000.

Another example: Arjun has a fixed deposit of INR 8 lakh at an interest rate of 8% p.a. He receives an annual interest of INR 64,000. The bank deducts TDS on the whole of INR 64,000. The prescribed rate of TDS is 10%. However, for the FY 2020-21 (from 14 May till 31 March 2021) the TDS is deductible at 7.5%.

When to pay income tax on interest on Fixed Deposit?

If there is any tax liability after the inclusion of your interest income in your total income tax on that should be paid before 31st March of that FY i.e. before the end of the Financial Year. You may also be liable to pay quarterly advance tax, if your total tax liability is more than INR 10,000

ITR Form to File to Report Income from FD Interest

Taxpayers must file ITR 1 and report the income from FD interest under the income from other sources head. This is in the case where the taxpayer is only receiving income from FD interest.

Check which ITR Form to file?
Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.
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Check which ITR Form to file?
Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.
Explore

TDS in relation to FDs

Interest Income of senior citizens

Senior citizens receiving interest income from FDs, savings account 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 cannot deduct any TDS.

FAQ

How will I receive the interest amount?

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.

What is the exemption limit for FD?

If an individual opts for old/existing tax regime, then under Section 80C of the Income-tax Act, you can claim deduction for investments up to INR 1.5 lakh in a financial year by investing in tax-saving fixed deposits (FDs)

How much money can I lock in a Fixed Deposit?

The lower limit and upper limit vary according to the bank.

Got Questions? Ask Away!

  1. Hi Harshil,

    Yes, you can revise your income tax return with tax audit. The revised due date for the same is November 30, 2020. However, please note that a penalty may be levied under section 271B. The minimum penalty that can be charged is 0.5% of the total sales, turnover, or gross receipts. The maximum penalty applicable is INR 1,50,000. A penalty can be avoided if the taxpayer provides a reasonable cause for not having the accounting records audited.

    Further, yes non-speculative losses can be set off against FD interest income and you can claim a refund of the excess tax paid. Hope this helps :slight_smile:

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