The Buyt Desk
According to the Income Tax regulation, the interest you earn from different investment instruments is taxable. It is considered your gross income and taxed according to your tax bracket. It applies to all instruments like fixed deposits, bonds, stocks, recurring deposits, etc. But Income Tax Act has some provisions using which you can save taxes on interest earned from different sources.
To know about these options, understand how earned interest is taxed and how to save tax on these earnings.
Taxability of Interest Earned from Savings Account
The Income Tax Department has bifurcated how interest will be charged on the savings account and fixed deposit. The interest income coming from the saving account, co-operative society saving account, or post-office saving account is taxable under section 80TTA of the Income Tax Act, 1961. The maximum deduction amount is Rs. 10,000 per year. It is not applicable to interest earned from all savings accounts. It confines only to the above-mentioned banks.
On the other hand, if the total interest earned from all saving accounts is more than Rs 10,000, which generally does not happen as most people invest their extra amount in investment instruments that ensure better returns. The deduction can be availed only for Rs 10,000.
The same deduction is different for senior citizens. For senior citizens, if a senior citizen has earned less than Rs. 50,000 through an interest in totality, then it will not be taxed and claimed as a deduction. If the income is more than Rs. 50,000, then tax relief will be given only up to Rs. 50,000, and over and above this will be taxed.
Taxability on Interest Income Coming from Fixed Deposit
The interest earned on a fixed deposit is fully taxable as it is considered income from other sources by the bank. Therefore, the interest sum gets added to the gross income. The banks deduct the TDS (Tax deducted at Source) if the interest earned is more than Rs. 40,000. And for senior citizens, the cap is Rs 50,000. If the interest earned is more than the cap amount, it comes in the taxable category. Banks deduct the TDS at the rate of 10%, and if the depositor does not have a Permanent Account Number (PAN), it is 20% TDS.
Paying TDS is not enough for those having higher incomes and falling in any tax bracket. For these individuals, the income earned through interest is added to the gross income of that person and taxed accordingly.
If any person’s total income is below the tax slabs, he can request tax exemption from the banks by filing form 15G. It is 15H for senior citizens.
Senior citizens can claim a deduction on interest income earned above Rs 50,000, according to section 80TTB.
Taxability on Interest Income Coming from Bonds
Any income gained from a bond gets taxed on an accrual basis, considering it as income from other sources. And the profit and loss coming from the bond are considered capital gains. One can take benefit of the Income Tax Act section 10(15)(iv)(h) to get an exemption in this tax.
Income From Public Provident Fund
The interest earned from PPF is tax-free. PPF falls under the category Exempted-Exempted-Exempted (EEE) category.
