Priyanka Sambhav
Did you know that interest income earned on deposits and investments are taxable? Not reporting interest income is one of the common mistakes that taxpayers commit. People are either not aware or not sure as to how is interest income treated under income tax. The interest that one receives on the savings bank account, fixed deposits(FD), post office scheme, recurring deposit(RD) attract tax. At the same time, interest on few investments like public provident fund(PPF) and Sukanya Samriddhi Yojna are tax-free.
The banks will deduct a TDS on deposits when the interest earned is more than Rs 40,000. TDS threshold for interest income for senior citizens is Rs 50,000. Some may have this misconception that since the bank has deducted tax on interest, so there is no need to pay any tax. But TDS is just 10% of the income, and you may be in the higher tax slab and thus have a higher tax liability.
Let’s have a look at various types of interest income and how is it taxed in your hands-
Savings Account
If your savings account interest crosses Rs 10,000, then be prepared to pay tax on it. Section 80TTA gives a deduction of up to Rs 10,000 on savings account interest, but beyond this limit, the received interest is taxable. The interest earned will be taxed under the head ‘ income from other sources’. If you have multiple accounts, then you need to add all of them and check if it is under the permitted limit of section 88TTA or not. The consolidated amount from multiple accounts if crosses Rs 10,000 gets taxed.
Fixed Deposit (FD)
The interest earned on FD is fully taxable as per the applicable slab rates of the taxpayer. As far as TDS is concerned bank will deduct a 10% TDS above Rs 40,000 interest for non-senior citizen and senior citizen above Rs 50,000 of interest. If you don’t have a PAN then TDS will be at 20%. To avail exemption on TDS, one can file Form 15G and 15H for senior citizens if the overall taxable income from all sources is below the respective exemption limit.
Recurring Deposits (RD)
The interest earned from RD is taxable. One will need to add the interest income as ‘income from other sources’ when you file your IT returns. Banks will cut TDS on Recurring Deposits at 10%.
Kisan Vikas Patra(KVP), National Saving Certificate(NSC) & Senior Citizen’s Saving Scheme (SCSS)
The interest earned from all these three schemes is fully taxable. Interest will be added to individuals income and taxed as per the applicable tax slab rate.
Tax-free Interest Income
Public Provident Fund(PPF) and Sukanya Samridhi Yojna (SSY) gives you the advantage of exempt-exempt-exempt(EEE). Thus the interest earned and the withdrawal amount of is tax-free. Even though this income is tax-free, but you need to declare this in your IT return.
