Tax on Interest Income in India: Everything You Need to Know

Interest income might be one of the most common forms of passive earnings in India. You could earn this income without actively working for it. This income may be earned through keeping money in savings accounts, fixed deposits, recurring deposits, or investing in government and corporate bonds. But just like salary or business profits, this income might also be taxable. 

 

Many people may not realise how it’s taxed or how to claim deductions correctly. This could lead to unnecessary tax payments or may even result in notices from the Income Tax Department.

Understand the taxation rules on interest income in India, how TDS (Tax Deducted at Source) works, the available deductions, and legal ways to reduce your tax burden.

Interest income refers to the money you could earn from keeping your funds in financial instruments that accumulate interest over time. It includes:

• Savings Account: Interest received on the balance in your savings account.

• Fixed Deposits (FDs): Earned by locking in funds at a fixed interest rate.

• Recurring Deposits (RDs): These are regular investments where the interest accumulates over time.

• Bonds and Debentures: Both corporate and government bonds could pay periodic interest.

• Post Office Schemes: Earnings from National Savings Certificate (NSC), Senior Citizens Savings Scheme, etc.

• Employee Provident Fund (EPF): Interest on EPF might be tax-exempt under certain conditions.

 

Since interest income does not fall under your regular salary or business income, it may be classified as ‘Income from Other Sources’ under the Income Tax Act.

Tax on interest income depends on two main things: the type of interest and your income tax slab.

Different types of interest income are taxed or exempted in the following ways:

• Savings Account Interest: Individuals below 60 years of age might be able to claim a deduction of up to ₹10,000 under Section 80TTA.

• FD and RD Interest: Interest from Fixed Deposits and Recurring Deposits falls under the section “Income from Other Sources” and is taxed according to the applicable income tax slab.

• Senior Citizens (60+ years): Senior citizens could claim a total deduction of up to ₹50,000 deduction under Section 80TTB on interest income from FD and savings account under the old regime.

• Interest from Bonds: Generally taxable unless specified as tax-free.

• Post Office Schemes: Some are exempt; for example, interest from Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY).

• EPF Interest: Tax-free if the account is held for 5 years or more, or if withdrawn due to reasons like ill health or reasons beyond your control. Otherwise, it may be taxable depending on the duration of service and withdrawal conditions.

Example:

Suppose you have a fixed deposit of ₹10 Lakhs, and your bank offers an interest rate of 6% p.a. This means you would receive an annual interest of ₹60,000. Since the total interest income exceeds ₹40,000, the bank deducts TDS on the entire ₹60,000 at the prescribed rate of 10%. As a result, ₹6,000 is deducted as TDS. 

Unless you are a senior citizen and opt for the old regime which allows you to claim a deduction of up to ₹50,000 under Section 80TTB. In this case, ₹50,000 of your interest income is tax-free, and only the remaining ₹10,000 (₹60,000 - ₹50,000) is taxable. Therefore, the bank will deduct TDS only on the ₹10,000 at 10%, resulting in a TDS of ₹1,000.

Banks and financial institutions deduct TDS on interest earned, depending on the amount.

Interest income might fall under different taxation systems depending on the investment:

• Progressive Tax System

Most interest income (FD, RD, savings account, bonds) is taxed as per your income slab.

The amount of tax you pay increases as your income increases.

• Flat Tax Rate:

Certain interest types (like winnings, or specific bond types) may be taxed at a fixed rate, usually 30%.

• EEE (Exempt-Exempt-Exempt) System:

PPF, EPF (after the set conditions are met) and Sukanya Samriddhi Yojana may fall under this model. You might not be required to pay tax at any stage, whether during investment, on interest, or at maturity under these schemes.

You could reduce your tax burden in the following ways:

• Use Section 80TTA and 80TTB:

You could use Section 80TTA and 80TTB if you have opted for the old tax regime to claim certain deductions. Here’s how much amount you could claim under each:

80TTA: Deduction up to ₹10,000 on savings account interest (for individuals under 60).

80TTB: Deduction up to ₹50,000 on total interest income (for senior citizens).

• Invest in Tax-Free Instruments:

Opt for instruments that don’t attract tax such as:

- Public Provident Fund (PPF)

- Tax-Free Bonds

- Sukanya Samriddhi Yojana

- EPF (after the set conditions are met)

• Submit Form 15G/5H:

If your income is below the taxable limit, submitting this form to your bank helps avoid unnecessary TDS deductions.

• Know the Clubbing Provisions:

If you invest in the name of your spouse or minor child, remember that the interest earned could still be clubbed with your income and taxed accordingly.

Here’s how you could include interest income correctly in your Income Tax Return:

• Collect Form 16A from banks (it shows interest paid and TDS deducted).
  

• Check Form 26AS on the income tax portal to confirm TDS is credited.
  

• Declare total interest income under ‘Income from Other Sources’ in ITR-1 or ITR-2.
  

• Claim relevant deductions under Section 80TTA or 80TTB if applicable.
  

• Adjust tax payable by considering TDS already deducted.
  

• Submit and e-verify your return using Aadhaar OTP or net banking.
  

• Not Reporting Small Interest Income

Many people ignore savings account interest thinking it’s too small to matter. But even these small amounts could be reported to stay compliant and avoid scrutiny.

• Missing Out on Deductions

Some individuals forget to claim deductions such as 80TTA or 80TTB even when applicable, which could potentially reduce their taxable income.

• Relying Only on Bank Certificates

Banks might only issue TDS certificates when the deduction exceeds a certain limit. Always check your passbooks and interest certificates for the actual earned income. Even if no TDS is deducted by the bank, It is still advisable to report your interest income while filing the income tax return.

• Incorrect Form Selection

Filing ITR-1 when you might actually need ITR-2 because of higher interest income or multiple sources of income could lead to rejection or notices from the Income Tax Department.

 

Additionally, as India gradually moves towards a more simplified tax system, taxpayers could expect more tools and automation to calculate and report interest income accurately. It may be helpful to stay updated through official channels or consult tax experts to ensure compliance.

Interest income may seem small compared to salary or business profits, but it’s equally important in tax planning. Whether it's a small amount or a larger one, it could add up and so might the tax. By understanding how different types of interest income are taxed, using available deductions, and submitting Form 15G or 15H if eligible, you could lower your tax burden effectively.