Interest income may be obtained through various sources, including savings bank account, fixed deposits, recurring deposits and post office savings accounts. The income which taxpayers earn through the interest from post office and savings accounts is credited to the taxpayer’s bank account. On the other hand, the interest which taxpayers obtain from fixed deposits is either credited to the bank account or reinvested in the deposit. It is essential for taxpayers to know that all interest incomes earned from any of these sources must be included in the concerned individual’s income tax return. The interest income is added to the total income of the taxpayer and taxed at a slab rate which is applicable to the respective individual. This article provides a brief explanation concerning Interest Income.
Interest on Savings Account
All the interests obtained on a Savings Account, i.e. Savings Bank Account, Co-operative Bank, Post Office Savings Scheme are completely taxable. Any interest that gets accumulated in a savings bank account must be declared in the tax return under income from other sources. Taxpayers should note that banks do not deduct Tax Deducted at Source (TDS) on savings bank interest. Interests earned from fixed deposits and recurring deposits are taxable. On the other hand, interests from savings bank accounts and post office deposits are tax-deductible to the extent notified under law. However, all incomes which fall under the category of interest income must be shown under income from other sources mandatorily.
Section 80TTA: Deductions on Deposits in Savings Accounts
With effect from the assessment year 2013-2014, a deduction of upto INR 10,000/- in aggregate to an assessee (an individual or a Hindu Undivided Family) for any income by way of interest on deposits, excluding time deposits, in savings account with the following shall be allowed.
- A Banking Company
- A Co-operative Society engaged in running a bank (including a co-operative land mortgage bank or a co-operative land development bank)
- A Post Office
Section 80TTB: Deductions for Senior Citizens
With effect from the assessment year 2019-2020, the Government of India has implemented a deduction of upto INR 50,000/- in aggregate to a senior citizen in respect of any income by way of interest on deposits, excluding time deposits, in savings account with the following:
- A Banking Company
- A Co-operative Society engaged in running a bank (including a co-operative land mortgage bank or a co-operative land development bank).
- A Post Office
Section 80TTA: Eligibility for Tax Deductions
According to Section 80TTA, the benefit of tax deductions on a bank interest income is available for Hindu Undivided Families or Individuals only. However, where the previously mentioned income is derived from any deposit in a savings bank account held by, or on behalf of a particular firm, an Association of Persons (AOP) or a body of individuals, no deductions shall be allowed in respect of such income in the computing the total revenue of any partner of the firm or any member of the association or body. No Tax Deduction at Source (TDS) is also applicable.
Section 10(15)(i): Exemptions for Post Office Savings Bank Interest
As per Section 10(15)(i), Post Office Savings Account Deposit interests will be exempted upto INR 3,500/- in the case of an individual and INR 7,000/- in the case of a joint account holder.
Taxpayers should note that interest incomes on Post Office Savings Deposit will receive double the benefit from the assessment year 2012-2013 onwards. Initially, it will be exempted upto INR 3,500/- in the case of an individual and INR 7,000/- in the case of a joint account holder under Section 10(15)(i) and then the tax deduction of INR 10,000/- under Section 80TTA.
Interest on Fixed Deposits
- Taxpayers should add the interests received from Fixed Deposits along with an individual’s other incomes such as a salary or a professional income. An amount as tax must be paid on that income as applicable to the concerned person.
- Tax Deducted at Source is deducted on the interest income, though it may not have been paid, when it is earned. For example, a bank would deduct Tax Deducted at Source on an interest accrued each year on a fixed deposit for five years. Therefore, it is best recommended to pay tax annually instead of paying taxes after the fixed deposit matures.
- With effect from 1st of April, 2018, Senior Citizens are eligible to enjoy an income tax exemption of upto INR 50,000 on an interest income received from fixed deposits with post offices, banks and so on as stated under Section 80TTB.
Avoiding Tax Deducted at Source on Fixed Deposits
- Banks should assume the responsibility to deduct tax when an interest income from the deposits held in all the branches of the bank put together would cross INR 10,000 in a year.
- If Permanent Account Number (PAN) details are available, a 10 per cent of Tax Deducted at Source would be deducted. If Permanent Account Number (PAN) details are not available, a 20 per cent of Tax Deducted at Source would be deducted.
- Form 26AS includes the details concerning Tax Deducted at Source on fixed deposit interests. If an individual’s total income is below the taxable limit, it is possible to avoid the tax deduction on a fixed deposit by submitted the following forms to the bank along with a request not to deduct any Tax Deducted at Source.
- Form 15H: This form is for any senior citizen who is of 60 years of age or older.
- Form 15G: This is form is for other assessees.
- These forms are exclusively for residents and for those individuals whose taxes add to nil only. These forms are required to be submitted at the beginning of a financial year. If an individual missed submitting these forms, the concerned individual might claim a refund by filing an income tax return. Form 15H and Form 15G are valid for a year only. Therefore, they must be submitted every year to keep the banks from deducting taxes.
Reporting Deposits in Tax Return
If an individual has three fixed deposits open, the all the interest incomes from all the deposits must be added up and entered under “Other Interest Income”. Tax Deducted at Source at 10 per cent would be deducted on the interest on a fixed deposit if the interest obtained is more than INR 10,000/-. On the other hand, for recurring deposits, starting from June of 2015, a 10 per cent tax on interests earned when the interest income from all the branched of a bank exceed INR 10,000 in a financial year. This interest earned must also be shown under “Other Interest Income”. Tax Deducted at Source at 10 per cent of interest would be deducted on recurring deposit interest exceeding INR 10,000/-.
Section 56(2)(viii): Interest on Compensation
With effect from the assessment year 2010-2011, income by way of interest received on compensation or enhanced compensation as stated under Section 28 of the Land Acquisition Act of 1894, shall be assessed under the head of termed as “Income from Other Sources” in the year in which it is received. Under Section 57(iv), 50 per cent of such an interest is deductible. However, no other deduction is permitted.
Interest from Capital Gains Account Scheme of 1988
Interest from the deposit under Capital Gains Account Scheme of 1988 has nothing to do with the provisions relating to taxation of capital gains. The interest is taxable in the year in which it is due and credited in the assessee’s account as income from other sources.
Interest on Tax Refund
Interest on the refund is taxable in the year of receipt under the head, “Income from Other Sources”. The interest received under Section 214 from the Government did not arise out of an act concerning business or investment but arose out of deprivation suffered by the assessee of use of money. Therefore, it was assessable as income from other sources and not as a business income.
Interest on Fixed Deposit of Minor
Children may receive gifts from grandparents or relatives in the form of money. Parents often tend to keep the money so collected in fixed deposits to ensure the money shall be useful when needed for the child. The interest income received by the child or the minor from the fixed deposit is taxable. However, the interest income cannot be taxed as part of the assessment of children and minors, and hence the parents should pay the tax applicable on them. In other words, the interest income received by the children would be clubbed along with the parents’ income, whichever is higher.
Section 2(28B): Interests on Securities
Income through interest on securities is taxable under the head “Income from Other Sources”. If the same is not taxable as a business income under Section 28. If the books of account in respect of such income are maintained on a “cash basis”, then the interest is taxable on receipt basis. However, if books of account are not maintained or are maintained by the mercantile system of accounting, then interest on securities is taxable on an accrual basis.
Section 56(2)(id): Interest on Securities
Income through interest on securities is taxable if the particular income is not chargeable to income tax under the head of “Profits and gains of business or profession”.
Deductions allowed from Interest on Securities
The following amounts allowed as deductions from interest on securities.
- Section 57(i): Expenses incurred from the collection of interest
- Any reasonable sum paid through commission or remuneration to a banker, or any other person to realise the interest.
- Section 57(ii): Interest on Load took for investment in Securities
- Interest on the money borrowed for investments in securities can be claimed as a deduction.
- Section 57(iii): Any expenditure to earn such income
- Any other spending, not being the expenditure of a capital nature, extended wholly and exclusively to make or to obtain such an income can be claimed as a deduction.
No Requirement for Tax Deducted at Source
The necessary exemption in the case of interest on securities paid by the Government, State Government, Corporation, Reserve Bank of India (RBI) and so on, who deduct taxes under Section 193 is INR 5,000/- of aggregate interest paid or credited in a year.
Section 2(28B): Context of Interest on Securities
The following are the meanings interest on securities in the context of Section 2(28B).
- Interest on any security of the State Government or a Central Government.
- Interest on debentures or any other securities for the money issued by or on behalf of a local authority, company or corporation that is established by a Central, State or Provincial Act.
Securities may be divided into the following categories.
- Securities issued by the Central/ State Governments.
- Debenture/ bonds issued by a local authority.
- Debenture/ bond issued by a company.
- Debenture/ bonds issued by a corporation established by a Central, State or Provincial Act, i.e. independent and statutory corporation.
Interest on Compensation
Interest on compensation awarded by the Motor Accidents Claims Tribunal is taxable in the hands of the recipient on a payment basis. Tax deduction from interest payment on the compensation amount awarded by the Motor Accident Claims Tribunal shall be made at the time of payment only if the amount of such payments during a financial year exceeds INR 50,000. Interest awarded by the Motor Accidents Claims Tribunal under Section 110CC of the Motor Vehicles Act of 1939, in an accident compensation case is a taxable revenue receipt.
Interest on Unrecognized Provident Fund
Interest received by an employee at the time of retirement on his contribution to an unrecognised provident fund is taxable as income from other sources.
Interest Earned Before Commencement of Business
Interest earned on the short-earned investment of funds, borrowed for setting up for a factory, during construction of factory before launch of business has to be assessed as income from other sources and it cannot be held to be non-taxable on ground that it would go to reduce interest liability on borrowed amount which would be capitalized.
Interest on Kisan Vikas Patras (KVP)
All interest received by the individual from Kisan Vikas Patras is fully taxable as on accrual basis per Income Tax Slab Rates of the recipient individual. Tax Deducted at Source is not deductible on interest on Kisan Vikas Patras (KVP).
Interest on National Saving Certificate
Interest on National Savings Certificate is chargeable to tax by annual accrual. The accrual interest for the first five years is deemed as re-investment, and the same is entitled to a deduction under Section 80C.
Interest earned on Non-Resident Ordinary (NRO) account
The entire interest income earned by a Non-Resident Indian (NRI) from the Non-Resident Ordinary (NRO) account is taxable in India. However, individuals are eligible for a necessary exemption of INR 2.5 Lakhs on their total income.
Interest on unsecured loan
An unsecured loan is a kind of credit that is supported and issued only by the creditworthiness of the borrower, rather than by a type of collateral. An unsecured loan is a type of loan that is obtained without the use of a property as collateral for the loan. Interest received on an unsecured loan is taxable. Tax Deducted at Source under Section 194A is deductible on Interest on an unsecured loan.
Interest Income Exempted
Section 10(4)(i): Interest earned in Non-Resident External (NRE) Account
Any income through the interest on money standing to the individual’s credit in a Non-Resident (External) Account in any bank throughout India shall be exempt from the tax in the case of an individual who is a person who is a resident outside India or a person who has been approved by the Reserve Bank of India (RBI) to maintain the aforesaid account. No taxation on the interest is earned on NRE Accounts, and for this reason, there will be no Tax Deducted at Source on the income derived from NRE Account.
Section 10(4)(ii): Interest paid to Non-Resident
The amount of interest payable to a non-resident on such securities or bonds as the Central Government of India, may, by notification in the Official Gazette, specify in this behalf, including income through a premium on the redemption of such bonds, shall be exempt from tax. The exemption under this particular Section shall not be permitted on interest on bonds or securities issued after the 1st of June, 2012.
Interest on General Provident Fund (GPF)
Any interest earned on Public Provident Fund (PPF)/ Provident Fund (PF) account is wholly exempt from the levy of Income Tax in the hands of the receiver.
Interest on Public Provident Fund (PPF)/ Provident Fund (PF)
Any interest earned on Public Provident Fund (PPF)/ Provident Fund (PF) account is entirely exempt from the levy of taxes in the hands of the receiver. No taxation on the interest is earned on here, and for this reason, there will also be no Tax Deducted at Source on the income earned here.
Interest Credited to Statutory Provident Fund
Interest credited to such a fund is exempt in the hands of the employee.
Interest Credited to Recognised Provident Fund
Interest credited to such a fund up to 9.5 per cent per annum is exemption the hands of the employee, interest more than 9.5 per cent is charged to tax in the hands of the employee.
Section 10(15): Interest earned on Deposit Certificates
With effect from the assessment year 2016-2017, interest earned on Deposit Certificate issued under Gold Monetisation Scheme of 2015 shall be exempt from tax.
Interest on Gold Deposit Bonds
Interest on Gold Deposit Scheme of 1999 is exempt from taxes.
Section 10(15): Interest on Securities
The following table would explain interest incomes which are exempt under Section 10(15).
|10(15)(i)||Interest, a premium on redemption, or other payment on notified securities, bonds, certificates, and deposits, etc. (subject to declared conditions and limits)||All assesses|
|10(15)(iib)||Interest on notified Capital Investment Bonds informed before 1st of June, 2002.||Individual/ Hindu Undivided Family|
|10(15)(iic)||Interest on notified Relief Bonds||Individual/ Hindu Undivided Family|
|10(15)(iid)||Interest on notified bonds (notified before the 1st of June, 2002) purchased in foreign exchange (subject to certain conditions)||Individual who is an NRI/ nominee or survivor of NRI/ individual to whom NRI has gifted bonds.|
|10(15)(iii)||Interest on securities||Issue Department of Central Bank of Ceylon|
|10(15)(iiia)||Interest on deposits made with a scheduled bank with the approval of RBI||Bank incorporated abroad|
|10(15)(iiib)||Interest payable to Nordic Investment Bank||Nordic Investment Bank|
|10(15)(iiic)||Interest payable to European Investment Bank on loan granted by it in pursuance of framework agreement dated 25th of November, 1993 for financial corporation between Central Government and that bank.||European Investment Bank|
|10(15)(iv)(a)||Interest received from Government or from the local authority on money lent to it before the 1st of June, 2001 or debts owed by it before the 1st of June, 2001, from sources outside India.||All assesses who have lent money, etc., from sources outside the country.|
|10(15)(iv)(b)||Interest received from industrial undertaking in India on money lent to it under a loan agreement entered into before the 1st of June, 2001.||Approved foreign financial institution|
|10(15)(iv)(c)||Interest at the approved rate received from Indian industrial undertaking on money lent or debt incurred before the 1st of June, 2001 in a foreign country in respect of purchases made outside India of raw materials, capital plant or components and machinery under certain limits and conditions.||All assesses who have lent such money, or in favour of whom such debt has been incurred.|
|10(15)(iv)(d)||Interest received at an approved rate from the specified financial institution in India on money lent from sources outside India before the 1st of June, 2001.||All assesses who have lent such money.|
|10(15)(iv)(e)||Interest received at an approved rate from other financial institutions or banks on money lent for specified purposes from sources outside India before the 1st of June, 2001 under the approved loan agreement.||
All assesses who have lent such money.
|10(15)(iv)(f)||Interest received at an approved rate from Indian industrial undertaking on money lent in foreign currency from sources present outside India under a loan agreement approved before the 1st of June, 2001.||
All assesses who have lent such money.
|10(15)(iv)(fa)||Interest payable by a scheduled bank, on the deposits in foreign currency, when RBI approves acceptance of such deposits by a bank.||Non-residents or individuals/ HUF who is not ordinarily resident in India.|
|10(15)(iv)(g)||Interest received at an approved rate, from Indian public companies eligible for deduction under Section 36(1)(viii) and formed with the main object of providing long-term housing finance, on money lent in foreign currency from sources present outside India under a loan agreement approved before the 1st of June, 2003.||All assesses who have lent such money.|
|10(15)(iv)(h)||Interests received from any public sector companies in respect of the notified bonds or debentures and under certain conditions.||All assesses|
|10(15)(iv)(i)||Interest received from the Government on deposits in notified scheme out of money due on account of retirement.||Individual Employee of Central Government or State Government or Public Sector Companies.|
|10(15)(v)||Interest on securities held in the Reserve Bank’s SGL A/c No. SL/DH-048 and Deposits made after the 31st of March, 1994 for the benefit of the victims of the Gas Leak Disaster in Bhopal held in such accounts with RBI or with notified public sector banks.||Welfare Commissioner, Bhopal Gas Victims, Bhopal.|
|10(15)(vi)||Interest on Gold Deposits Bonds issued under the Gold Deposit Scheme of 1999 notified by the Central Government.||All assesses|
|10(15)(vii)||Interests on notified bonds issued by local authorities or State Pooled Finance Entity.||All assesses|
|10(15)(viii)||Interest on deposit made on or after the 1st of April, 2005 in Offshore Banking Units referred to in Section 2(u) of the Special Economic Zones Act of 2005.|
Saving Tax Deducted at Source (TDS) on Interest
- Form 15G and Form 15H are self-declaration forms that are required to be furnished by the assessee to their banker for NIL deduction/ lower deduction of TDS on the interest on Fixed Deposit/ Recurring Deposit.
- If an individual’s total income is less than the minimum amount which is subject to tax, then the individual may submit Forms 15G and 15H. These forms are a declaration that the concerned individual’s total income is less than the taxable amount and therefore, no TDS should be deducted on the interest earned.
- Senior citizens can submit form 15H. Form 15G can be filed by non-senior citizens, i.e. individuals who are below 60 years of age and who satisfy both the criteria mentioned below:
- The final tax on the person’s estimated total income computed as per the provisions of the Income Tax Act should be NIL.
- The aggregate of the interest and other income received during the financial year not exceeding the basic exemption limit according to the prevalent Income Tax Slabs. At present for the assessment year 2020-21, the Government has ascertained the basic exemption limit to be Rs. 5 lakh for super senior citizens (above 80 years of age).