When you invest in different instruments or park your savings in a bank account, you generally earn interest. This is termed as interest income and is subject to taxation as per the Income Tax Act. 


Tax on interest income depends on how you earned the interest, i.e., the instrument, and if there are deductions applicable. Understanding how interest income is taxed will enable you to avoid any filing errors and ensure that you don't miss out on any tax savings. 


To learn more about tax on interest income in India, read on.

Taxation on Types of Interest Income

1. Interest from FDs and RDs

Fixed and recurring deposits are among the most popular investment options. This is due to the rising interest rates resulting in a substantial interest income. However, the interest you earn from these instruments is taxable under Section 194A of the Income Tax Act.


As per the guideline of the IT Act, the issuer will deduct TDS on your interest earnings if it exceeds ₹40,000 in a given financial year. The limit extends to ₹50,000 if you are a senior citizen. 


The standard TDS deduction rate is 10%. However, the rate goes up to 20% if you don't have a PAN. So, for example, if your interest income from FDs and RDs amounts to ₹60,000, the TDS deducted will amount to ₹6,000 if you have a PAN and ₹12,000 if you do not. 


Although there is no interest income exemption, you can avoid the TDS deduction by submitting form 15G, or form 15H if you are a senior citizen. The form states that you do not have a taxable income and hence are not liable to pay taxes.

2. Interest from Savings Accounts

Most individuals park their funds in a savings account, and the bank offers interest at a certain rate. However, this interest income attracts tax under the Income Tax Act. However, unlike the interest from FDs or RDs, the interest from a savings account is not subject to TDS as per Section 19A of the IT Act. 


Instead, the interest amount is directly added to your income and taxed as per the applicable tax slab. Although there is no TDS deduction, the interest earned from a savings account is subject to deduction as per Section 80TTA, and 80TTB for senior citizens. 


The deduction is capped at ₹10,000 for the non-senior citizen taxpayer and at ₹50,000 for senior citizen taxpayers. This means that if your interest on savings amounts to ₹20,000, ₹10,000 of it is taxable if you are under the age of 60. 


However, as a senior citizen, this interest amount will attract no taxation. In simple terms, the interest amount you have after levying the deduction gets added to your total income and is subject to taxation as per the slab rate you fall into. 


There will be no taxation if the interest amount is under the deduction limit.

3. Interest from Public Provident Fund

Public Provident Fund, or PPF, is an investment scheme curated for low-risk investors. Under this scheme, your returns are in the form of interest on your investment amount. What makes this investment option popular is its ‘EEE’ status.


EEE status denotes that the investment option is Exempt from taxation for its principal amount, interest earned, and maturity amount. This means that you enjoy a deduction for the amount you invest and withdraw on maturity, and also on the interest you earn during the tenure.


This instrument's interest income exemption applies under Section 10(11) of the Income Tax Act. However, it is crucial to remember that your investment amount is capped as per Section 80C. So, ensure you don't end up paying more tax on the investment amount than you save on interest.

4. Interest from Bonds

Private as well as public companies issue bonds where you earn on investment through the coupon rate. These bonds can offer lucrative returns, making them a preferred investment instrument for many. But the interest you earn is not exempt, unlike the interest from a PPF.


However, if the bond is tax-free, interest income exemption norms may be applicable. Here, the interest you earn is entirely exempt from taxation. For all other bonds, the interest income gets taxed as per the applicable slab rates.


You will have to add the interest amount to your income under the 'Income from Other Sources' head. Post that, the tax rate for your interest income will be as per the slab rate under which your income falls, after adding the interest income and other income if any.


For example, if your income after adding the interest income falls under the slab of 30%, the tax will be levied at 30%. Other than the tax-free bonds, the interest you earn from bonds is not subject to deduction as per the Income Tax Act.


With an answer to the question, “What is interest income?”, and insights into the different types of interest income, and how interest is taxed, be sure to invest accordingly. Optimising your investments can maximise your tax savings and steadily grow your wealth. 

FAQs on Tax on Interest Income

Which interest is taxable?

Your interest income from your savings account, deposits (fixed and recurring), PPF, and bonds is taxable under the Income Tax Act.

Is there a tax deduction in interest income?

Yes, there is a tax deduction available for the interest you earn. However, the applicable deduction depends on the source from which you earned the interest.

How much tax do I pay on interest income?

The tax you pay on your interest income depends on the interest earned and the deduction applicable if any. If there are any deductions, the interest amount after deduction is taxable as per the relevant section of the Income Tax Act.

Under which head is interest income taxed?

Your interest income goes under the head' Income From Other Sources', IFOS for short. The deductions applicable will go under the head for deduction under a specific section.

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