Taxation of interest income from investments

You may be aware that the interest income you earn on investment instruments such as fixed deposits, recurring deposits, bonds, etc. are subject to tax. You also need to disclose the details of interest income in your income tax return. 

You can reduce your taxability by availing of the many tax benefits that are available under the Income Tax Act, 1961(IT Act). But before you do this, you need to know how interest income is taxed. Let’s take a look at the taxability of interest incomes.

Interest income on domestic fixed / recurring deposits

The interest income earned on a fixed deposit is taxable, and you have to pay taxes as per the applicable tax rates under the IT Act for the said financial year. Moreover, banks deducts tax at source (TDS) on interest paid on fixed deposits when interest income exceeds Rs 40,000 (Rs 50,000 for senior citizens) in any given financial year for residents. 

The current rate of TDS for residents on interest income over the above limits is 10%. However, TDS shall be deducted at higher rate of 20% if a person does not have a PAN or in case of specified persons..  ‘Specified person’ refers to someone who has not filed their Income Tax Returns for both of the previous two years; and has aggregate TDS/TCS credit of Rs 50,000 or more in each of the two years. NRIs are subject to TDS at the rate of 30% plus applicable surcharge and cess.

One can also avail of an exemption on TDS by filing Form 15G (15H for senior citizens) if their overall taxable income from all sources is below the maximum amount not chargeable to tax. . Senior citizen can claim a deduction on interest income upto Rs. 50,000/- as per Section 80TTB.

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Interest income on savings account

If you earn interest income of up to Rs 10,000 from a savings account, you can claim tax deduction under Section 80TTA of the IT Act. However, if this amount exceeds Rs 10,000, it is taxable as per applicable slab rates. To calculate the exemption limit, add up all saving interest income from all accounts, including bank savings accounts, post office savings accounts, and cooperative bank savings accounts. . Senior citizen can claim deduction of interest income upto Rs. 50,000/- as per Section 80TTB for interest on Fixed deposit and interest on saving accounts.

Interest income on corporate bonds

Corporate bonds issued by public or private companies are taxable as per slab rates on an accrual basis. The interest income on bonds is included in ‘Income from other sources’, whereas the profit/loss from the sale of bonds is taxable under capital gains. However, interest income on tax-free bonds is exempt under Section 10(15)(iv)(h) of the IT Act. These are mostly government bonds or bonds from public undertakings such as Indian Renewable Energy Development Agency Ltd.

Interest income on PPF

If you earn interest income from a Public Provident Fund (PPF), you are not required to pay any taxes as it is fully exempt. PPF falls under the Exempt-Exempt-Exempt (EEE) scheme. Accordingly, the deposit, the interest earned, and the withdrawal amount are all exempt from tax.

The interest income you earn on investment instruments is subject to taxes as per various sections of the IT Act, 1961. However, if you want to avail of an exemption, you can invest in HDFC Bank investment products or look for schemes like Sukanya Samriddhi Yojana to enjoy tax-free returns.

Click here to know more about the lesser-known income tax deductions.

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The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take or refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.