Income Tax on Interest Income

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?

  • The interest component which is earned on saving account is considered as ‘Income from other Sources’.
  • This interest income will be declared in your Income Tax Return and will be taxable as per the applicable slab rate.
  • As per Section 19A of the Income Tax Act, 1961, TDS is not to be deducted on interest on a savings account.
  • For NRIs, tax is deducted at source (TDS) at 30% on interest on Non-Resident ordinary accounts. 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 under Section 80TTA of the IT Act.
  • Interest on a savings account up to INR 10,000 is technically treated as a deduction. For example, if your gross total income is INR 10 lakh and you have savings account interest of INR 25,000 a deduction of INR 10,000 will be made from your gross total income.

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:

  • 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.
  • 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.

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.

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TDS in relation to FDs

  • When does the bank not deduct TDS
    • If total interest income from all FDs with a bank is less than INR 40,000 in a year, the bank cannot deduct any TDS.
    • The limit is INR 50,000 in case of a senior citizen aged 60 years and above.
    • Prior to Budget 2019, the limit of TDS on interest income was INR 10,000.
  • When does the bank deduct TDS @ 10%
    • When the interest income for the year from all the FDs with the bank exceeds INR 40,000 (INR 50,000 in the case of senior citizens) there would be a 10% TDS deduction from such interest income .
  • The TDS Deduction will be 20% if you don’t provide your PAN to the particular bank. So do 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 for senior citizens and 15G is for other than senior citizens. Submit these forms at the beginning of each financial year to avoid additional TDS deduction and subsequent refund from the IT Department.

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.

Section 80C : Deductions for Tax Saving Investments

Section 80C allows individuals and HUFs to claim deductions for certain investments and expenses which are specifically mentioned under the Income Tax Act. The maximum limit for deduction under section 80C is INR 1,50,000.

Deduction under section 80C is not allowed for Financial Year 2020-21 if the taxpayer opts for the new tax regime
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Deduction under section 80C is not allowed for Financial Year 2020-21 if the taxpayer opts for the new tax regime

Investments Eligible for Section 80C Deduction

Contribution to ELSS: When you invest in Equity Linked Saving Scheme or a tax saving mutual fund then you are allowed a deduction under section 80C. Investment in ELSS funds comes with a lock-in period of 3 years.

Investment in Public Provident Fund: It is backed by Government and carries a fixed interest rate (8.0% p.a. subject to change). You can invest a minimum INR 500 and maximum INR 1,50,000 in a financial year. Any investment in Public Provident Fund (PPF) is allowed as a deduction under this section. PPF deposits fall under the EEE (Exempt, Exempt, Exempt) tax category. Of which all three things including deposit, interest, and withdrawal amount are eligible for tax exemption.

Contribution to Employees Provident Fund: Employees contribution to Provident fund is also eligible for deduction under section 80C. This contribution amounts to 12% of the salary. At present, the interest rate in EPF contribution is 8.8%

Investment in Pension Fund by UTI: Any amount invested by an individual in a pension fund set up by a mutual fund or UTI is allowed as a deduction under section 80C up to INR 1,50,000.

Investment in National Savings Certificate (NSC): NSC is a scheme run by Indian Post and carries an interest rate of 8.1%. Although there is no upper limit for investment in NSC, the deduction will be allowed only up to INR 1,50,000 under section 80C

Investment in Tax Saving Fixed Deposit: Different banks and financial institutions offer term deposits which are created for tax saving under section 80C. The lock-in period of such tax saving deposits is 5 years and you can not withdraw money before its maturity.

Investment in Sukankya Samridhhi Savings Scheme: The scheme was launched for the betterment of girl children in India. Deposits in this scheme will earn interest at 8.6% per annum and will be eligible for deduction under this section. The maturity period of the deposit will be 21 years from the date of opening the account.

Investment in Unit Linked Insurance Plan (ULIP): It is a mix of insurance and investment. Since the investment portion is dependent on market performance, there are no fixed returns. Any investment made under this is allowed as deduction u/s 80C

Senior Citizen Savings Scheme (SCSS): Any person who has aged more than 60 years or a person over 55 who has opted for retirement, can invest in a senior citizen savings scheme. Savings under the SCSS scheme will earn interest at 8.6% per annum. This deposit has a lock-in period of 5 years and is eligible for deduction under section 80C.

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Payments Eligible for Section 80C Deduction

Life insurance Premium: Any amount paid as life insurance premium for self, spouse or children is allowed as deduction under section 80C. The premium amount has to be lower than 10% of the sum assured.

Home loan repayment: Repayment of principal amount towards a home loan taken for construction or purchase of residential house property, is allowed as deduction under section 80C. Even stamp duty expenses, registration expenses and transfer expenses are also allowed as deduction.

Children’s tuition fees: Tuition fees paid for up to two children is allowed as a deduction under section 80C. The fees could be paid to any school, college, university, or educational institution in India. The fees have to be for a full-time course.

For FY 2019-20, due to COVID-19 the due date for filing ITR has been extended to 30th November 2020 for all taxpayer.
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For FY 2019-20, due to COVID-19 the due date for filing ITR has been extended to 30th November 2020 for all taxpayer.

ITR Form Applicable for Section 80C

The taxpayer can claim deductions u/s 80C while filing ITR if all the above-mentioned conditions are full-filled. Individuals/HUFs can claim 80C in any of the ITR forms, i.e, ITR 1ITR 2ITR 3, and ITR 4 depending upon their income sources. The due date for filing ITR is 31st July of the next FY if the tax audit is not applicable.

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Supporting Documents

Along with the common documents such as Form 16, you will need to provide these documents:

  • Life Insurance Premium receipts
  • Deferred Annuity receipts
  • NSC Accrued Interest receipts
  • Provident Fund contrition receipts
  • Receipt of Term Deposit for 5 years or more with a scheduled bank
  • Receipt of Public Provident Fund contribution
  • Receipt of Senior citizen saving scheme deposit
  • Receipt of Contribution made to a superannuation fund
  • Receipt of Tuition fees
  • Receipt of Investment in Debentures / Shares of Companies as approved by CBDT, etc.

FAQs

How to claim deductions in ITR?

You have to claim section-wise deductions while filing your income tax return. In every ITR, there is a separate section for Chapter VI-A Deductions where you can enter all your deductions against respective sections. for eg. life insurance premium, ELSS, PPF, etc will go to section 80C where medical insurance premium will go under section 80D.

Who can claim section 80C deductions?

As per income tax act, any Individual or HUF can claim deduction under section 80C. This deduction is not available to corporate assessees

Can I claim the 80C deductions at the time of filing return in case I have not submitted proof to my employer?

Proof of investments is submitted to the employer before the end of a Financial Year (FY) so that the employer considers these investments while determining your taxable income and the tax deduction that needs to be made. However, if you miss submitting these proofs to your employer, the claim for such investments made can be done at the time of filing your return of income as long as these investments have been made before the end of the relevant FY.

Tax Saving FD (Fixed Deposit) – Features and Eligibility

What are Tax Saving FD?

Tax saving FD (Fixed Deposit) a.k.a Tax saving Term Deposit are Fixed deposits with different maturity periods. To qualify for tax benefits, the lock-in period is 5 years.

The investment objective of term deposits is to provide tax benefits under section 80C of the Income tax Act. It aims at motivating individuals to save since it has the dual benefit of investment and tax saving.

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Features of Tax Saving Fixed Deposit

  • The Minimum Amount you can invest is INR 100 & thereafter in Multiples of INR 100
  • The maximum investment in any financial year is INR 1,50,000
  • The maturity period of a term deposit is 5 years starting from the date of receipt
  • The term deposit shall not be pledged to secure a loan or as security to any other asset
  • You are not allowed to withdraw money from your account until its maturity
  • The interest rate on FD is between 7-9%
  • When the interest is paid by the scheduled bank in a lump sum at the time of maturity, the term deposit receipt shall bear the yearly rate of interest on the term deposit
  • Interest on these term deposits shall be liable to tax
  • Nomination facility is available. You can nominate/authorize someone to withdraw your deposit before or post-maturity in the event of your death

Who can invest in Tax Saving Fixed Deposit?

All Resident individuals and Hindu Undivided Families are eligible to invest under Tax Saving Term deposits. Term deposit shall be of following types, namely:-

  • Single holder type deposits – The single holder type deposit receipt shall be issued to an individual for himself or in the capacity of the Karta of the Hindu undivided family
  • Joint holder type deposits – The joint holder type deposit receipt may be issued jointly to two adults or jointly to an adult and a minor, and payable to either of the holders or to the survivor

No nomination shall be made in respect of a term deposit applied for and held by or on behalf of a minor. In the case of joint holder type deposit, the deduction from income under section 80C of the Act shall be available only to the first holder of the deposit. The interest earned is subject to tax deduction at source as per tax laws.

FAQs 

Is interest on FD taxable?

Yes. Interest earned on any kind of Fixed Deposit is taxable. TDS will be deducted @ 10% in case the total interest income from such deposits exceeds Rs. 10,000 in a year.

Can I withdraw from FD before maturity? 

No. As per Government notification, no premature withdrawal is allowed for the Tax-Saving FD

Is there a lock-in period for a tax saving FD?

Yes, the lock-in period is a minimum of 5 years.