Income Tax on Interest Income
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Interest Income
Compute income tax on interest earned through other sources. Know more about tax on interest income for senior citizens. Contact Tax Robo today.
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Interest Income
People put their hard-earned money into savings Bank accounts, fixed and recurring deposits, public provident funds, etc to watch their money grow over time, hoping the amount would increase to fulfill their long-term financial goals.
However, interest earned on these financial tools is Taxable after a certain limit.
Let us look at these modes of investment and how much Taxes are incurred on the interest earned on these funds.
1. Savings Bank Account
Interest income of up to Rs. 10,000 in a financial year is eligible for Tax deduction under Section 80TT of the IT Act. But note that this limit of Rs. 10,000 is the sum of your interest income from all your savings accounts, including savings accounts in Public/Private Banks, cooperative Banks, and even Post Offices.
If the Interest Income is above Rs. 10,000 in a financial year, the amount above this limit will be added to your Taxable income and will then attract Tax as per your Income Tax slab.
2. Fixed Deposit (FD)
The interest that you earn from FD is fully Taxable as per your Tax slab. Also, the Bank will automatically deduct TDS at the rate of 10%, if your income from all your FDs is above Rs. 40,000 in a financial year. For senior citizens, this limit is up to Rs. 50,000 under Section 80TTB. More importantly, TDS will be deducted at 20% in case the Taxpayer has not submitted PAN.
Do note that W.e.f. 14th May 2020 up to 31st March 2021, the TDS on interest earned above Rs. 40,000 (Rs. 50,000 for senior citizens), has been reduced to 7.5%. However, if you don't furnish your PAN details, it still remains at 20%.
3. Recurring Deposit (RD)
Just like FDs, your interest income from Recurring Deposit (RD) is fully Taxable too. In the past, TDS did not apply to RDs. However, as per the changes made in 2015, under Section 194A, even RD accounts are now charged with TDS at the rate of 10%.
Unlike a savings Bank account that comes with a deduction limit of Rs. 10,000, you don't get any deductions with RD. The entire interest income will be Taxed as per your Tax slab.
4. Debt Mutual Funds
Most of the debt mutual funds also invest in fixed-income-generating securities. If you have invested in such funds, short-term capital gains, or gains generated within 3 years from the date of the investment will attract STCG at 30% without the indexation benefit.
If you hold your investment for more than 3 years, the long-term capital gains would be taxed at the rate of 20% with an indexation benefit.
5. Public Provident Fund (PPF)
PPF is also a very popular savings-cum-investment option in India as it combines returns, tax savings, and safety. It is one of the few interest-bearing investment options in India where the investors are not required to pay any Taxes.
PPF belongs to the EEE (Exempt-Exempt-Exempt) category, which means that there is no Tax on interest income, deposit amount, or even the withdrawal amount. However, the minimum maturity period of PPF is 15 years.
Tax Robo helps you choose the right financial tool to earn a handsome interest on your savings while avoiding hefty Taxes.
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Income Tax Filing Packages
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Five Main Heads of Income
Income from Salary
- Salary is defined as the remuneration that a person receives periodically for rendering services based on an implied or express contract.
- The Salary for the purpose of calculation of income from Salary includes:
- Wages
- Pension
- Annuity
- Gratuity
- Advance Salary paid
- Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages
- Annual accretion to the balance of Recognized Provident Fund
- Leave Encashment
- Transferred balance in Recognized Provident Fund
- Contribution by Central Govt. or any other Employer to Employees Pension A/c as referred in Sec. 80CCD.
Income from House Property
i. Basis of Charge [Section 22]:
- Income from house property shall be Taxable the house property should consist of any building or land.
ii. The Gross Annual Value of the house property shall be higher of following:
- Expected rent
- Rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy
iii. Deductions
Municipal Taxes
Standard Deduction [Section 24(a)]
30% of net annual value of the house property is allowed as deduction
Interest on Borrowed Capital [Section 24(b)]
Let-out property - Actual interest incurred on capital borrowed
Self-occupied property - Interest incurred on capital borrowed allowed as deduction upto Rs. 2 lakhs. The deduction shall be allowed acquisition or construction of house property is completed within 5 years.
Maximum loss set off allowed in a Financial Products year is limited upto Rs. 2 lakhs, remaining loss can be carried forward to future years, 8 years in total
Income from Capital Gains
Any Income derived from a Capital asset movable or immovable is Taxable under the head Capital Gains under Income Tax Act, 1961.Short Term Capital Gains:
- Sold a Capital asset within 36 months and Shares or securities within 12 months of its purchase then the gain arising out of its sales after deducting there from the expenses of sale (Commission etc) and the cost of acquisition and improvement is treated as short term capital gain and is included in the income of the Taxpayer.
Taxability of short term capital gains:
- Section 111A of the Income Tax Act provides that those equity shares or equity oriented funds which have been sold in a stock exchange and securities transaction Tax is chargeable on such transaction of sale then the short term capital gain arising from such transaction will be chargeable to Tax @10% upto assessment year 2008-09 and 15% from assessment year 2009-10 onwards.
- A Capital Asset held for more than 36 months and 12 months in case of shares or securities is a long term capital asset and the gain arising there from is a long term capital gain. Long term capital gains are arrived at after deducting from the net sale consideration of the long term capital asset the indexed cost of acquisition and the indexed cost of improvement of the asset.
Taxation of Long term capital gains
- The long term capital gains are Taxed @ 20% after the benefit of indexation as discussed above. No deduction is allowed from the long term capital gains from Section 80C to 80U. But in case of individual and HUF where the Income is below the basic exempted limit the shortage in basic exemption limit is adjusted against the long term capital gains.
Income from Profits and Gains of Business or Profession
Under Section 28, the following income is chargeable to Tax under the head "Profits and Gains of Business or Profession":
- Profits and Gains of any Business or Profession.
- Any compensation or other payments due to or received by any person specified in Section 28(ii).
- Income derived by a trade, professional or similar association from specific services performed for its members.
- The value of any benefit or perquisite, whether convertible into money or not, arising from Business or the exercise of a Profession.
- Any interest, salary, bonus, commission or remuneration received by a partner from firm .
- Fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner.
- Income from speculative transaction.
Income from Other Sources
"Income From Other Sources" is any income which is not specifically Taxed under any other head of income will be
- Taxed under this head.
- Section 56(2)(i), Dividends
- Winnings from lotteries, crossword puzzles, races including horse races, card game and other game of any sort, gambling or betting of any form whatsoever, are always Taxed under this head.
- Interest Income
- Gifts received by an individual
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Document Required for E-Filing Income Tax Return
Proof of Income
- Form 16 Copy – Part A & Part B
- Fixed Deposits
- Capital Gain Statement Share Broking
- FD Interest Certificate
- Invoice Copy
- Contract Copy
Proof of Deduction
- Life Insurance Premium
- Medical Insurance Premium
- School Fees Receipts
- House Property Tax
- Interest Certificate Housing Loan
- Tax Savings Documents
- Additional Deduction Documents
This may come as a surprise but you don't need any documents or proofs to attach with your Income Tax Returns.
All you need is your Aadhar ID linked with your PAN.
You need documents ONLY IF YOU SEEK TO CLAIM DEDUCTIONS while filing Income Tax.
You DO NOT NEED TO ATTACH ANY DOCUMENTS in your IT return application. Fill your Income Tax return honestly and claim deductions that genuinely apply to your application.
You may need documents only if an Income Tax assessing officer sends you a notice asking you to present those documents before them. Till then, procure all the documents that may be needed and keep them safe.
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