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 available under the Income Tax Act 1961(IT Act). But before you do this, you must know how interest income is taxed. Let’s take a look at the taxability of interest incomes.

1. Interest income on domestic fixed/recurring deposits
   Interest income from fixed deposits is taxable according to the IT Act. Moreover, banks deduct TDS on interest exceeding ₹40,000 (₹50,000 for senior citizens) in a financial year.
   
   The current rate of TDS for residents on interest income over the above limits is 10%. However, TDS shall be deducted at a higher rate of 20% if a person does not have a PAN or in the case of specified persons.  ‘Specified person’ refers to someone who has not filed their Income Tax Returns for the previous two years and has an aggregate TDS/TCS credit of ₹50,000 or more each year. NRIs are subject to TDS at 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 taxable. Senior citizens can claim a deduction on interest income up to ₹50,000/- as per Section 80TTB.
   
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2. Interest income on savings account
   If you earn interest income of up to ₹10,000 from a savings account, you can claim a tax deduction under Section 80TTA of the IT Act. However, if this amount exceeds ₹10,000, it is taxable 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 citizens can claim a deduction of interest income up to ₹50,000/- as per Section 80TTB for interest on Fixed deposits and interest on saving accounts.
   
   
3. 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 the Indian Renewable Energy Development Agency Ltd.
   
   
4. 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 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 learn 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 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.