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.

REIT : Real Estate Investment Trust

Real estate is one of the vital sectors of the Indian economy. REIT is an investment vehicle that enables individual investors to earn income via the underlying real estate property. They do this without directly owning the property. It is similar to the concept of a mutual fund. Where a fund pools small sums from individuals and institutions and invests in stocks. The investments take place through a trust directly or via Special Purpose Vehicles (SPV). In REIT, the trust puts money in property. REITs own many types of commercial assets ranging from office spaces to hospitals, shopping centers, hotels, and warehouses.

Types of REIT

  • Equity

It is the most popular type of REIT. The majority of REITs are publicly traded equity REITs. Equity REITs own or operate income-producing commercial properties. The common source of income here is rents.

  • Mortgage

Commonly known as mREITs, it mostly involves itself with lending money to proprietors and extending mortgage facilities. REITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments. Mortgage REITs also generate income in the form of interest accrued on the money they lend to proprietors.

  • Hybrid

Investors can diversify their portfolio by parking their funds in both mortgage REITs and equity REITs. Hence, both rental income and interest income are the sources of income for this particular kind of REIT.

  • Public non-listed REITs (PNLRs)

Public non-listed REITs (PNLRs) are registered with the SEBI. However, they are not tradable on the National Stock Exchange. These options are less liquid. Also, they are more stable as they are not subject to any market fluctuations.

  • Private REITs

Private REITs are are exempt from SEC registration and whose shares do not trade on National Stock Exchanges. These trusts function as private placements, which caters to a selective list of investors.

REIT – Criteria’s to Comply With

REITs need to meet the below criteria for their qualification as per SEBI guidelines 2019:

  • The company must have an asset base of at least 500 Crores
  • For an Asset to qualify as SPV (Special Purpose Vehicle), REIT shall hold controlling interest and at least 50% of the total nominal value of equity in that SPV
  • Distribution of 90% of net distributable cash flow to unit-holders in the form of interest/dividend
  • 80% of the investment should take place in income-generating assets. Furthermore, only 20% of the total investment can take place under-construction assets
  • In the case of REIT, section 115(O)(7) should be readable with section 115BBDA to establish the taxability of dividends received from SPVs

Advantages of Investing in REIT

Following are the benefits of investing in REIT:

Option to Divesify

As REITs are usually traded on stock exchanges, it gives the investors the benefit of diversifying their real estate portfolio.

Dividend Income and Capital Appreciation

Individuals investing in REIT get the benefit of steady and substantial dividend income and over the long term, it also allows steady capital appreciation.

Liquidity

As REIT are mostly traded on stock exchanges, it becomes very easy to buy and sell them, hence adding the benefit of quick liquidity.

Risk Adjusted Returns

REIT offers its investors the advantage of earning risk-adjusted returns that help in generating a steady force of income for them. During the time of high inflation, investing in REIT can help in having a steady source of income.

Taxability

Taxability of REITs

  • REITs have a pass-through status u/s 10(23FC) w.r.t interest receivable from an SPV or dividend that refers to in section 115(O)(7) of the Act
  • Any income of a business trust by way of renting or leasing of any real estate asset directly owned by the trust does not form part of total income u/s 10(23FCA)
  • The total income of a business trust consists of interest and dividend income from SPVs, rental income if it holds rent generating assets, investment income from funds/FDs where surplus money is available, capital gains under section 111A and 112
  • According to the sections 111A and 112 of the Income Tax Act, the total income of a business trust shall be chargeable to tax at a Maximum Marginal Rate
  • As per section 115(O)(7), no tax shall be chargeable on dividends declared by a specified domestic company to a business trust out of its current income on or after a specified date
  • If there is any declaration, distribution or any dividend payment by the specified domestic company out of its accumulated profits and current profits up to the specified date, in such cases no tax shall be chargeable

In the hands of Unit Holders

  • Section 115UA of the Income Tax Act governs the taxability of unit-holders
  • Income distributed by business trust to its unit holders shall be treated of the same nature. The treatment shall be in the same proportion as it is receivable by the trust
  • Unit-holders receiving any income distributed by trusts such as interest or dividend shall be treated as income of the unit-holder for that previous year subject to provisions of the Act
  • Whereas if trust repays principal to unit-holders, it shall be treated as capital receipts in the hands of unit-holders and not “income” since section 56(2)(x) read with section 115UA implies that the income received without consideration shall be taxable under section 56(2)(x) and section 115UA contains the words “income distributed by a business trust”
  • Since unit-holders are the beneficiaries of units held by them in the trust, the amount of principal received for units is not without consideration; henceforth section 56(2)(x) shall not apply
  • Transfer of units by unit-holders shall be chargeable to Capital Gains Tax at applicable rates
  • Any short-term capital gains arising on the transfer of units shall be chargeable to tax at 15 percent. Long-term capital gain is taxable at 10% if the amount exceeds INR 1 lakh

How to Invest in REIT?

Just like any other stock, investors can buy shares in a particular REIT in three ways:

Stocks: Individuals who are looking for investing in a direct way in REIT go for this option.

Mutual Funds: Investors who wish to have a diversified portfolio invest in REIT through mutual funds.

Exchange-Traded Funds: This option is for those investors who want to avail indirect ownership of properties and also want to benefit from its diversification.

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FAQ

Is REIT dividend taxable?

The dividend received was earlier tax-free in the hands of the investors. However, Finance Minister Nirmala Sitharaman in Budget 2020-21 scrapped the dividend distribution tax for companies and shifted the burden on investors. While nothing changes for SPVs and the trusts as they still won’t pay tax, unitholders of REITs are no longer exempt.

What is the impact of Covid on the REIT?

-Concern over the demand for office space as some companies are planning to continue with the work from home (WFH) model adopted to battle the covid-19 infection attributes to fall the value of REIT.
– Also, the change in the income tax law, making dividend income taxable in the hands of some investors, will make REITs less attractive.