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