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.

Exempt Income under Income Tax

What is Exempt Income?

There is a common myth that if you are earning any income then you will have to pay tax on it. The more you earn, the more would be the tax liability. But it is not true. There exist certain types of income for which your tax liability is zero. Such incomes are known as Exempt Income u/s 10 of the Income Tax Act. Such income is different from Deduction under Income Tax. While exempted incomes are excluded from the total taxable income of a taxpayer, deductions are availed on taxable incomes.

Types of Exempt Income

  • Agriculture Income:
    • Any income earned by the taxpayer from agriculture activity is exempt from tax. However, the agriculture income must be included in the total income for the calculation of the applicable slab rate. Thus, it is indirectly taxed by taxing the non-agriculture income at higher tax slab rates.
  • Gift Received from Relatives: 
    • Any gift received by an individual from relatives is exempt from tax. Gift received on the marriage or by way of will is exempt. Monetary gift received from non-relative up to Rs. 50,000 is also exempt from tax.
  • Long Term Capital Gain: 
    • From FY 2018-19, LTCG up to INR 1,00,000 is exempt from tax. Earlier, the long-term capital gain on the sale of stocks and equity mutual funds was exempt from tax under section 10(38). This section is not applicable to debt mutual funds.
  • Interest on Securities: 
    • Income from securities in the form of interest, premium, etc from government-issued bonds, certificates, deposits are tax-free. For eg: Bonds issued by NHAI, IRFC, REC, etc.
  • Profit Share from Partnership Firm: 
    • Any share of profit from a partnership firm or LLP is exempt from tax in the hands of the partner. However, interest on capital and remuneration is taxable.
  • Provident Fund: 
    • Payment received from PF is exempt under Section 10. However, PF withdrawal is taxable for less than 5 years of service. In the case of EPF, the taxpayer can withdraw the balance subject to a few conditions.
  • Gratuity: 
    • Gratuity received by a government employee is totally exempt from tax. Whereas in the case of employees of a private organisation, it is exempt subject to certain conditions.
  • Commuted Pension: 
    • Commuted pension received by the government employee is fully exempt. However, for other employees, it is exempt subject to certain conditions.

Other Exempt Income

  • Life Insurance: 
    • The payment proceeds of a life insurance policy are exempt under section 10(10D). This includes a maturity amount as well as death claims.
  • Receipts From HUF: 
    • Any amount received out of family income is tax-free in the hands of a member. For example, a family owns an impartible estate. An amount received out of an income of family estate by the member of such HUF is tax-free in the hands of the member.
  • Scholarship and awards: 
    • Any type of scholarship or award granted to any deserving student to meet the cost of education is exempt from tax. The entire sum of money received as a scholarship gets that tax exemption.
  • Amount Received under VRS (Voluntary Retirement Service): 
    • When an employee receives an amount under the scheme of voluntary retirement as per Rule 2BA of the Income Tax Rules gets a tax exemption up to Rs. 5,00,000 from the amount received as voluntary retirement.
  • Allowance for Foreign Services: 
    • Any Indian resident rendering service outside India and receiving any allowances or prerequisite outside the country are exempt from income tax u/s 10(7) of the Act. Due to this section, any perquisite and allowances received by government servant while working outside India are tax-free.

Reporting Exempt Income in ITR

Taxpayers can declare their exempt income while filing for income tax every financial year. The taxpayer should report exempt income under the section ‘Exempt Income’ in the tab ‘Computation of Income and Tax’ of ITR-1 & ITR-4. You can add a row, select the nature of income from the dropdown list, add description and amount.

The taxpayer should report exempt income under Schedule EI i.e. Schedule Exempt Income of ITR-2 & ITR-3. The taxpayer should report the details under the specific row for Interest Income, Agriculture Income, Income not chargeable as per DTAA, other exempt income with a relevant option from the dropdown. The Exempt Income is separately reported and not added to the Gross Total Income.

Disclosure of Exempt Income for Salary and Non-Salary Allowances

For salary account holders, you need to make a disclosure of exempt income under Schedule S – Details of Income from Salary’ while filing income tax as per ITR-2. The various exemptions are:

  1. HRA – House Rent Allowance
  2. LTA – Leave Travel Allowance
  3. Leave Encashment Amount
  4. Pension Amount
  5. Gratuity Amount
  6. Any form of perquisites received
  7. Amount received from a Voluntary Retirement Scheme

For self-employed or non-salary account holders, there are certain incomes categorized under exempt income. They include dividends, agricultural income, interest on funds, capital gains which have to be disclosed under Schedule EI while filing income tax as per ITR-1.

FAQs

Is dividend income exempt from tax?

Earlier, the Dividend received from a Domestic Company was exempt from tax under Section 10(38). However, under Budget 2020, DDT was abolished thus making dividend a taxable income for a taxpayer. If dividend income exceeds INR 5,000, the company is liable to deduct TDS u/s 194 for dividend on equity shares and u/s 194K for dividend on equity mutual funds.

Is it mandatory to show exempt income in ITR?

Yes. You have to mention all your incomes while filing Income Tax Return, be it taxable or exempt. There is a separate tab to show exempt income in ITR. You need to mention the nature of exempt income and the amount of income received during the year.

Which ITR should I file if I have earned exempt income during a year?

You can file ITR-1 if you have earned only exempt income during a year. However, if you have earned agriculture income exceeding Rs. 5,000 then you should file ITR-2.

Income from Other sources and Taxes – IFOS : Guide

What is Income from Other Sources or IFOS?

Income from Other Sources is the residual head of income. Hence, any income which is not specifically taxed under any other head of income will be taxed under this head. Further, there are certain incomes that are always taxed under this head. These incomes are as follows:

  • Dividends from companies.
  • Winnings from lotteries, crossword puzzles, races including horse races, card games, and other games of any sort, gambling or betting of any form whatsoever.
  • Income by way of interest received on compensation or on enhanced compensation shall be chargeable for tax under the head “Income from Other Sources”.
  • Gifts are also taxed under this head.
  • Family pension.
  • Different interest incomes (eg. interest income from post office savings account, bank savings account, bank fixed deposit, etc.).
  • Interest received from IT Dept. on delayed refunds.
  • Insurance commission.
  • Income from letting out of machinery, plant, or furniture.
  • Income from royalty.
  • Any sum received under a Keyman Insurance Policy including bonus.
  • Director’s commission for standing as guarantor to bankers.
  • Remuneration received by Members of Parliament.
  • Income from sub-letting of House Property by a tenant, etc.

This is an inclusive list and not an exhaustive list. Please note that Agricultural income is exempt from tax so it will not fall under any of the heads of income. It will be mentioned as exempt income while e-filing the Income Tax Return.

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In addition to the above, the following incomes are charged to tax under this head, if not taxed under the head “Profits and Gains of Business or Profession.”

  • Any contribution to a fund for the welfare of employees received by the employer.
  • Income from
    • Interest on securities.
    • Letting out or hiring of plant, machinery or furniture.
    • Letting out of plant, machinery or furniture along with building where both the lettings are inseparable.
  • Any sum received under a Keyman Insurance Policy including bonus.

Taxability of Income from Other Sources or IFOS

Taxability of incomes falling under this head may differ as per their nature. Let’s have a look at the tax treatment on some of these incomes:

Taxability of Gifts under Income from Other Sources

Gifts can mainly be classified under following categories:

  • Monetary gifts.
  • Movable properties received without consideration or without adequate consideration.
  • Immovable properties received without consideration or without adequate consideration.

Gifts will be completely taxable under the head income from other sources with the following exceptions:

  1. Some of the money received as gifts will be exempt if the aggregate value of such received during a financial year does not exceed INR 50,000.
  2. Any property received without consideration and total fair market value of such properties received throughout the year does not exceed INR 50,000.
  3. Gifts received from relatives*
    • On the occasion of the marriage.
    • Under will/by way of inheritance.
    • In contemplation of death of the payer.
    • From local authority.
    • A fund, foundation, university, other educational institution, hospitals, or any trust or institution defined in Section 10(23C).
  4. Amount received from a charitable trust registered under Section 12AA.

*Relatives for this purpose means:

1. Spouse of the individual 2. Brother or sister of the individual
3. Brother or sister of the spouse of the individual 4. Brother or sister of either of the parents of the individual
5. Any lineal ascendant or descendent of the individual 6. Any lineal ascendant or descendent of the spouse of the individual
7. Spouse of the person referred to in (b) to (f)

 

Tax Treatment of Amount received from Life Insurance Policy

Any amount received under Life Insurance policy, including any bonus amount, is exempt from tax under section 10(10D) of the Income Tax Act. A few important points to be noted with regards to this exemption:

  • Exemption is available only in respect of amount received from Life Insurance policy.
  • Exemption is available only if amount of premium paid on such policy for a particular financial year does not exceed 20% (10% in respect of policies taken on or after 1st April, 2012) of the actual capital sum assured. Please note that any amount received on death of the policyholder will continue to be exempt without any conditions.
  • While calculating the actual sum assured, any premium amount agreed to be returned or any of the benefits by way of bonus shall not be considered.

Example

Pratik has taken a Life Insurance policy on 15th December 2014. The total sum assured is INR 50,00,000 and the annual premium is INR 82,000. The policy will mature in the year 2026 and the maturity amount will be INR 10,00,000.

  • Now in the event of Pratik’s death, the amount sum assured of INR 50,00,000 received by the nominee will be completely exempt.
  • In any other case, the amount received from the policy will be exempt if the annual premium of the financial year does not exceed 10% of the capital sum assured. Here the capital sum assured is INR 50,00,000 so 10% of 50,00,000 comes to INR 5,00,000. The annual premium paid by Pratik is only INR 82,000 so nothing will be taxable if money is received in an event other than death.

Tax Treatment for Dividend Income

  • Dividend income is chargeable under this head. However, it will be completely exempt if it is received from a company that was applicable to dividend distribution tax under section 115O of the Income Tax Act.
  • This exempt dividend will be mentioned under exempt income while e-filing the Income Tax Return.
  • Dividend received from co-operative societies or foreign companies will be completely taxable.

Tax Treatment for Interest Income

Taxability of interest income may vary, depending on the nature of interest income.

  • Although Interest on the savings bank account is taxable, deduction u/s 80TTA is available for a maximum limit of INR 10,000.
  • Interest earned on tax-free bonds is completely exempt.
  • Interest on Fixed deposit and recurring deposits is completely taxable. If the total interest income from such sources exceeds INR 10,000, then the banks will deduct the TDS @ 10%. (@ 20% if the PAN is not provided).
  • Interest on Public Provident Fund (PPF) account is completely exempt.
  • Any interest earned on the post office saving bank account is exempt upto a certain extent. In case of Individual account, interest is exempt upto INR 3500 & in case of Joint account, interest is exempt upto INR 7000.
Earned Income From Other Sources
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Can I claim any expenses from Incomes from Other Sources or IFOS?

Yes, the following are some of the deductions available from income chargeable to tax under the head Income from Other Sources or IFOS:

  • Any commission or remuneration paid for realizing dividend (taxable dividend) or interest on securities.
  • Any current repairs, insurance premium, and depreciation in respect of plant, machinery, building, and furniture are deductible from the rent income earned by letting out of such plant, machinery, building, and furniture.
  • In the case of family pension, the deduction is allowed for the lower of INR 15,000 or 1/3rd of such amount received in the nature of family pension.
  • Please note that no personal expenditure shall be allowed to be deducted from income chargeable under the head ‘Income from Other Sources’.

What tax deduction cannot be claimed under Income From Other Sources?

According to section 58 of the Income Tax Act, the following are deductions that cannnot be claimed during the computation of Income from Other Sources;

  • Amount mentioned as per section 40A
  • Any personal expenses
  • Amount paid towards wealth tax
  • Expenses associated with winnings from lotteries, races, crossword puzzles, games, gambling, or betting
  • A salary that is payable outside India on which tax is not deducted at the source
  • Any interest subject to tax that is payable outside India

FAQs

Is gift taxable as other income?

Gifts from relatives are exempt and any gifts received from non relatives are exempt upto an aggregate of Rs. 50,000 in a Financial year. Total value of gifts over and above Rs. 50,000 will be taxable under the head ‘Income from Other Sources’. Gifts received on the occasion of marriage are exempt from thax. Read here to know more about Gifts and thier taxability.

Can I claim any deductions on family pension?

As per Income Tax Act, you can claim a standard deduction of 1/3rd of the amount of family pension received subject to maximum of Rs. 15,000 annually.

Is lottery prize taxable?

Yes, lottery winnings are liable to flat rate of tax at 30% without any basic exemption limit. Thus in such a case the payer of prize money will generally deduct tax at source (i.e., TDS) from the winnings and will pay you only the balance amount.