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Income Tax on Interest Income

by | May 3, 2024 | Income Tax | 0 comments

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Important Keyword: Fixed Deposit, Income from Other Sources, Income Interest, Income Tax.

Income Tax on Interest Income

Interest-bearing investments like savings accounts, fixed deposits (FDs), and recurring deposits (RDs) are favored choices for those who prioritize security in their investments. However, it’s important to note that the interest earned from these investments is subject to income tax, much like any other source of income. Understanding how these interest incomes are taxed in India is crucial for investors to effectively manage their finances.

Taxability on Saving Bank Interest

Each quarter, the bank credits interest to your savings account, which is considered taxable income categorized under the head “Income from Other Sources.” It’s imperative to disclose this accrued interest in your income tax return. Here are several key points regarding the tax treatment of savings bank interest:

  1. TDS Not Applicable:
    • According to Section 194A of the Income Tax Act, there’s no requirement to deduct Tax Deducted at Source (TDS) from interest earned on savings accounts.
  2. Taxation for NRIs:
    • For Non-Resident Indians (NRIs), a tax of 30% is deducted on interest earned on Non-Resident Ordinary (NRO) accounts. However, no tax is applicable to interest earned on Non-Resident External (NRE) accounts.
  3. Deduction under Section 80TTA:
    • Individuals and Hindu Undivided Families (HUFs), excluding senior citizens, can claim a tax deduction on savings interest income of up to INR 10,000 in a financial year under Section 80TTA of the Income Tax Act.
    • For senior citizens, Section 80TTB is applicable, providing similar deductions but tailored to their specific circumstances.

Tax on Fixed Deposit Interest

Fixed deposits have long been favored by investors as a reliable investment avenue, offering the advantage of leveraging Section 80C to deduct ₹1.5 lakh from taxable income. However, the interest received on FDs is subject to taxation and is categorized under the head ‘Income from Other Sources.’ Here are several key points regarding the tax treatment of fixed deposit interest:

  1. Taxability at Slab Rates:
    • Interest earned on fixed deposits is taxable at the slab rates applicable to each taxpayer based on their income level.
  2. Taxation for NRIs:
    • For Non-Resident Indians (NRIs), a tax of 30% is deducted on interest earned on Non-Resident Ordinary (NRO) accounts. However, no tax applies to interest earned on Non-Resident External (NRE) accounts.
  3. TDS Deduction:
    • Under section 194A of the Income Tax Act, Tax Deducted at Source (TDS) is deducted by the bank when they credit interest to your account, not when the FD matures.
    • TDS is deducted at a rate of 10% only if the total interest income from deposits across all bank branches exceeds Rs. 40,000 in a year.
    • If PAN details are not provided to the bank, TDS deduction will be at the rate of 20%. Therefore, it’s essential to ensure that the bank has your PAN details on record.
  4. Form 15G/15H for TDS Avoidance:
    • Individuals whose income falls below the exempted limit can submit Form 15G (for those other than senior citizens) or Form 15H (for senior citizens) to avoid TDS deductions.
    • These forms need to be submitted at the beginning of each financial year to prevent additional TDS deductions.

How tax on FD interest is calculated?

Many taxpayers have recently received emails from the Income Tax Department regarding discrepancies in interest income between the Annual Information Statement (AIS) and the filed tax returns. To avoid such notices, it’s crucial to include your interest income in your total income and calculate your tax liability accordingly. Here’s a step-by-step guide to calculating tax liability on interest from FDs for your Income Tax Return (ITR):

  1. Add Interest Income to Other Sources:
    • Include the interest income earned from FDs under the head “Income From Other Sources” in your ITR.
  2. Determine Tax Slab Rate:
    • Identify the tax slab rate applicable to your total income for the relevant financial year.
  3. Check TDS Deduction in Form 26AS:
    • Compare your tax slab rate with the TDS deduction mentioned in your Form 26AS.
    • Note that banks do not deduct TDS for annual FD interest below INR 40,000.
  4. Consider Tax Liability Even Without TDS:
    • Even if no TDS is deducted, ensure you include the interest income in your total income and pay tax on it as per your applicable tax slab rate.
  5. Impact of Interest at Maturity:
    • If you opt to receive the interest from your fixed deposit at maturity, the total interest income accrued may push you into a higher tax bracket, leading to increased tax payments.
Let’s illustrate this with an example:
  • Anish holds two FDs with a bank, each valued at INR 2,00,000 for a 5-year period at an interest rate of 8% per annum. In the first year, Anish earns INR 16,000 interest from each FD, totaling INR 32,000 for the year. Since the annual interest per FD is below INR 40,000, the bank does not deduct TDS.
Another scenario:
  • Arjun maintains a FD of INR 10 lakh with a bank, yielding an annual interest of INR 70,000 at an interest rate of 7% p.a. The bank applies a TDS rate of 10% on the entire interest amount of INR 70,000.

By following these steps and understanding the tax implications, taxpayers can ensure compliance with income tax regulations and avoid discrepancies in their filings.

Interest Income of Senior Citizens

Senior citizens who earn interest income from FDs, savings accounts, and recurring deposits are eligible to claim a deduction of up to ₹50,000 annually under Section 80TTB. If the interest income from all FDs with a bank is below ₹50,000 in a year, the bank is not mandated to deduct any TDS. This provision offers a beneficial tax-saving opportunity for senior citizens, providing them with a way to reduce their taxable income and potentially lower their tax liability.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/

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