Tax on Interest Income

Is Interest Income Taxable? What are the tax implications?

Key Takeaways

Interest earned on your savings and investment instruments is taxable in India.
You are liable to pay taxes on interest earned of up to INR 10,000 on your savings account deposits.
You also have to pay TDS and basic tax on the interest income from Fixed and Recurring Deposits investments.
Investment securities like Mutual Funds attract capital gains tax.
Enjoy total tax exemption on interest earned on government-backed schemes like Public Provident Fund.

Most financial instruments in India, such as Savings Accounts, Fixed and Recurring Deposits, and investment vehicles, typically generate interest income. This interest you earn is considered an additional income source, and like any other income, is taxed as per the applicable Income Tax laws of the country. As per the Income Tax Act, 1961, you are liable to pay tax on your interest earnings upon crossing a certain threshold. Keep reading to know more about tax on interest income.

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How is Interest Income Taxable?

As mentioned earlier, any form of income is taxable. Listed below are tax implications for some widely used investment instruments.

Savings Accounts

Interest income of a maximum of INR 10,000 per financial year is tax-deductible under Section 80TT of the Income Tax Act, 1961. The INR 10,000 amount includes interest earned from all the Savings Accounts you have in various public and private sector banks, post offices, NBFCs, etc. However, if the interest income exceeds INR 10,000, it becomes taxable interest. In such a case, you have to pay taxes on the interest income per your Income Tax bracket.

Fixed Deposits

The interest earned on a Fixed Deposit is fully taxable, per your Income Tax slab rate. The bank deducts TDS of 10% for income interest of all your FDs exceeding INR 40,000 in a financial year. Under Section 80TTB, Senior Citizens enjoy a higher non-taxable interest limit of INR 50,000. Remember, the TDS rate will increase to 20% if you do not submit your Permanent Account Number (PAN).

Recurring Deposits

Tax on interest income on Recurring Deposits is similar to that on FDs. The entire interest earned is taxed per your Income Tax slab. The government also introduced a 10% Tax Deducted on Source (TDS) in Budget 2016 on RDs. However, you can claim TDS Exemption by submitting Form 15G (15 H for senior citizens) if your overall taxable income from all sources does not exceed the amount not chargeable to tax.

Debt Mutual Funds

Debt Funds primarily invest a significant portion of their assets in fixed-income securities. Gains earned on redeeming debt funds within 3 years, are called Short-term Capital Gains (STCG), taxed at 30%, plus taxes. Gains for funds redeemed after 3 years are Long-term Capital Gains (LTCG), taxed at 20%, plus taxes, with indexation benefit.

Public Provident Fund (PPF)

An investment scheme backed by the government, PFF offers guaranteed returns and tax benefits. While PPF has a longer investment/maturity period of 15 years, it falls under the Exempt-Exempt-Exempt (EEE) category. Thus, you do not have to pay tax on interest income, the principal deposited and the maturity amount.

Conclusion

Paying tax on interest income is mandatory while filing your returns. You must mention the interest income under the ‘Income from other sources section in the ITR form. Ensure you know the tax implications associated with your investments since they can significantly impact your overall returns.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.