Similar to how income is taxed, interest earned above a certain limit also attracts tax. Interest income earned from savings and investments like a savings account, post office schemes, fixed deposits, recurring deposits, are subject to tax. However, many taxpayers do not know and are not sure how the tax is treated or how their interest income is getting charged under the tax.
To start with, experts suggest, investors need to disclose their details of interest incomes in their Income Tax Returns. Taxpayers can also reduce their taxability, under the Income Tax Act, 1961, by availing the many tax benefits available. However, to save taxes on your interest income, you need to know how interest income is taxed.
In the Budget 2019, it was proposed to increase the TDS (Tax Deducted at Source) threshold from Rs 10,000 to Rs 40,000, on the interest earned on the deposits with banks and post office. The limit has been increased to Rs 50,000 for senior citizens. The proposal will include interest earned on savings deposits, FDs, along with other deposit schemes in banks and post offices.
If you are confused about how your interest income is taxed, know how to calculate tax on your interest income;
Savings account: As per the income tax slab rates applicable, interest on a savings account is taxable to the investor. However, under section 80TTA deduction is also allowed on interest from a savings account. This comes with a maximum of Rs 10,000 per year, and is available only to non-senior citizen individuals and HUFs.
Under section 80TTA of the Income Tax Act, from all savings bank account, interest up to Rs 10,000 earned is exempt from tax. This is applicable for all savings accounts with banks, co-operative banks, and post offices. If the interest earned from these sources exceeds Rs 10,000, the additional amount will be taxable. On tax on interest income, the account holder has to calculate and declare the interest under the head ‘Income from other sources’, from all saving bank accounts during the financial year.
Fixed Deposit: On accrual basis at the slab rate applicable, interest earned from fixed deposits is liable to be taxed. At income tax slab rates applicable to the taxpayer, interest on fixed deposit is fully taxable. Note that, there is no separate deduction for non-senior citizens. However, for senior citizen under section 80TTB, the deduction is allowed up to Rs 50.000. Minors holding deposits are also subject to TDS, and the person under whom the minor’s income is included can claim the credit for the TDS. To avail exemption on TDS, you need to file Form 15G and 15H for senior citizens if the overall taxable income of the investor from all sources is below the respective exemption limit.
TDS rates on Fixed Deposits:
1. On interest to residents, 10 per cent
2. In absence of PAN or valid PAN, 20 per cent is applicable
3. Non-Resident Indians, 30 per cent
Recurring Deposits: On the interest earned, Recurring Deposits attract tax deduction at 10 per cent. From 1st June 2015, TDS on Recurring Deposits at 10 per cent under section 194A was added which was earlier not charged. Investors can either reinvest the interest earned from recurring deposits or can withdraw the interest earned on RD. Investors receiving the interest on RD cannot claim any deduction on the same. Further, the tax would be charged on the full interest amount as compared to interest on a savings account, wherein a deduction of Rs. 10,000 is allowed.
Bonds: Issued by private or public corporations, corporate bonds are debt securities. On an accrual basis at slab rates, interest on corporate bonds are taxable. Experts suggest tax-free bonds are an advantageous option for investors as the interest received from tax-free bonds is exempt u/s 10 (15) (iv) (h) of the Income-tax Act, 1961.
Additionally, as these investments are made in government securities, investment in tax-free bonds is also deliberated as risk-free. The capital gains (the difference between the purchase and sale price of the bond) earned from these bonds, if held for more than 12 months, will be treated as long-term or else they are considered as short-term gains. These gains are tax efficient if held for more than 1 year. Bonds held for up to 12 months will be treated as short term capital gain, which will be taxed as ordinary income. Capital gains are generally taxed on the redemption of bonds. Short term capital gains are taxed as per slab rates; long term capital gains at 10 per cent, without indexation interest.
PPF (Public Provident Fund): PPF falls under the Exempt-Exempt-Exempt (EEE) category. Interest earned from PPF is fully exempted from tax without any limits, which was confirmed in the Budget 2016. The interest is compounded annually on PPF, with the calculation done every month. The interest earned as well as the withdrawals from PPF are tax-free.