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Interest-bearing investments such as savings accounts, fixed deposits, and recurring deposits are go-to options for risk-averse investors. All of these popular investment options generate an interest income, which is usually not related to the market conditions.But just like you are required to pay income tax on your income if it is above a certain limit, interest income also attracts tax above the threshold fixed by the government. Take a look at some of the most popular interest-bearing investments and how they are taxed in India-
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, co-operative banks, and even post office.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 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.
What Should You Select for Tax-Efficient Interest Income?
With so many different types of interest-bearing investment options, it can be challenging for a new investor to make the right decision. While every option has its advantages, every investor and his/her risk appetite, financial objective, life goals, etc. are different.The best option would be to get in touch with a reputed financial service provider so that their professional advisors can help you with personalized recommendations.
FAQS - FREQUENTLY ASKED QUESTIONS
How much interest on FD is TDS free ?
In India, Fixed Deposits (FDs) are a popular investment option for individuals looking for a safe and secure way to earn interest on their savings. The interest earned on FDs is taxable, but there are certain limits under which the interest earned is exempt from TDS (Tax Deducted at Source).
As per the current tax laws, the TDS on interest earned on FDs is applicable if the interest amount exceeds Rs. 40,000 per annum for individuals (under 60 years of age) and Rs. 50,000 per annum for senior citizens (above 60 years of age).
However, there are certain exceptions to this rule. If the interest earned on FDs is below these thresholds, then no TDS will be deducted. Additionally, if an individual's total income falls below the taxable income slab, then they can submit Form 15G or Form 15H (for senior citizens) to their bank to avoid TDS on their FD interest.
Important Fact: The exemption limit of Rs. 40,000 or Rs. 50,000 applies to the interest earned on FDs across all the branches of the bank, and not just one branch. Therefore, if an individual has multiple FDs in different branches of the same bank, they should consider the cumulative interest earned on all the FDs to determine whether TDS is applicable or not.
Do banks automatically deduct TDS on interest ?
Yes, banks in India are required to deduct TDS (Tax Deducted at Source) on the interest earned on Fixed Deposits (FDs) if the interest amount exceeds certain thresholds. As per current tax laws, TDS is deducted if the interest earned on FDs exceeds Rs. 40,000 per annum for individuals (under 60 years of age) and Rs. 50,000 per annum for senior citizens (above 60 years of age).
The bank is responsible for deducting TDS on interest earned on FDs and depositing it with the government. The TDS rate is 10% if the PAN (Permanent Account Number) is furnished, and 20% if the PAN is not furnished.
If an individual's total income falls below the taxable income slab, they can submit Form 15G or Form 15H (for senior citizens) to their bank to avoid TDS on their FD interest. However, if an individual fails to submit Form 15G or Form 15H and the interest earned on their FD exceeds the TDS threshold, then the bank will deduct TDS on the interest amount.
It is important for banks to deduct TDS on the entire interest amount earned on FDs, even if the individual's total income falls below the taxable income slab. In such cases, the individual can claim a refund of the TDS amount by filing their income tax return and showing the interest earned as their income.
What happens if I don’t show FD interest in ITR ?
If you do not show the interest earned on Fixed Deposits (FDs) in your Income Tax Return (ITR), you may face penalties and consequences from the Income Tax Department in India.
The interest earned on FDs is considered as income, and it is taxable as per the current tax laws. If you fail to disclose the interest income in your ITR, you will be in violation of the Income Tax Act, and the Income Tax Department may initiate penalty proceedings against you.
The penalty for non-disclosure of interest income depends on the amount of tax that has been evaded. If the tax evasion hits the limit of Rs. 5,000, the penalty will be 50% of the tax evaded. If the tax evasion is crosses the limit of Rs. 5,000, the penalty will be 100% of the tax evaded.
Moreover, if the Income Tax Department detects that you have not shown the interest earned on your FDs in your ITR, they may initiate a scrutiny assessment of your income tax return. During the scrutiny assessment, the Income Tax Department can ask you to produce evidence to support your claim of non-disclosure of interest income. If you fail to provide adequate evidence, the Income Tax Department may impose penalties, and you may have to pay additional tax along with interest.
What is section 80TTA under the Income Tax Act, 1961 in India ?
Section 80TTA of the Income Tax Act, 1961 in India provides a deduction to individuals and Hindu Undivided Families (HUFs) from their gross total income, for the interest earned on savings account deposits. This deduction is available for a maximum of up to Rs. 10,000 in a financial year.
The interest earned on savings account deposits is considered as income, and it is taxable as per the current tax laws. However, to provide relief to small taxpayers, the government has introduced section 80TTA, which allows a deduction of up to Rs. 10,000 on the interest earned on savings account deposits. The deduction is available to individuals and HUFs, and it is not available to other types of taxpayers, such as companies, firms, and LLPs.
It is important to note that the deduction under section 80TTA is available only on the interest earned on savings account deposits and not on the interest earned on fixed deposits, recurring deposits, or any other type of deposits. Moreover, the deduction is applicable only to the interest earned from savings accounts held with banks, cooperative societies, and post offices.
To claim the deduction under section 80TTA, the taxpayer needs to report the interest earned on savings accounts in the income tax return, and then claim the deduction under section 80TTA. The deduction amount will be subtracted from the gross total income of the taxpayer, and the taxable income will be computed accordingly.
What is section 80TTB under the Income Tax Act, 1961 in India ?
Section 80TTB of the Income Tax Act, 1961 in India provides a deduction to senior citizens from their gross total income, for the interest earned on deposits with banks, post offices, and co-operative societies. This deduction is available for a maximum of up to Rs. 50,000 in a financial year.
The deduction under section 80TTB is available only to senior citizens, i.e., individuals who are 60 years or above during the financial year. The deduction is available on the interest earned on fixed deposits, savings deposits, recurring deposits, and any other type of deposits with banks, post offices, and co-operative societies.
It's worth noting that the deduction under section 80TTB is only available to senior citizens, who are individuals aged 60 or over during the financial year. Additionally, it's important to differentiate between the deduction available under section 80TTA for interest earned on savings accounts and section 80TTB for interest earned on deposits with banks, post offices, and co-operative societies. Senior citizens are eligible to claim both deductions, subject to the applicable limits.
To claim the deduction under section 80TTB, the senior citizen needs to report the interest earned on deposits in the income tax return, and then claim the deduction under section 80TTB. The deduction amount will be subtracted from the gross total income of the senior citizen, and the taxable income will be computed accordingly.
What is the maximum amount that can be claimed under section 80TTA ?
Under section 80TTA of the Income Tax Act, 1961 in India, individuals and HUFs can claim a deduction of up to Rs. 10,000 in a financial year for the interest earned on their savings account deposits held with banks, post offices, and co-operative societies.
However, this deduction is not applicable to interest earned on fixed deposits, recurring deposits, or any other type of deposit. Additionally, only individuals and HUFs can claim this deduction, and it's not available to other types of taxpayers, such as companies, firms, and LLPs.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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