Do I need to pay tax on interest income? How is it classified?
23 Jan 2020
FIIs (Fixed Income Instruments) have retained their popularity with Indian investors since time immemorial. For instance, a SEBI survey has found that Indians prefer investing in instruments like Fixed Deposits more than they prefer investing in gold, life insurance, or real estate. In the fixed income instrument bracket, Fixed Deposit accounts are also much more popular than savings accounts or current accounts.
However, a question that has played on everyone’s mind revolves around the tax implications of investing in such instruments. While the interest that accrues from such investments is most definitely a handsome amount, you may often find yourself wondering if it is taxable under Indian Income Tax laws. Here, we help clarify this for you. Let’s have a look at the various instruments and the taxability of their interest.
The interest income earned from fixed deposits is taxable. While filing income tax returns, FD interest income is classified under Income from Other Sources. There’s a notable exemption: Fixed Deposit accounts opened at post offices as opposed to banks are exempt from tax liabilities.
Most people, however, prefer to open their fixed deposits accounts at banks for their convenient and speedy service. For Indian residents under the age of 60, FD interest income under ₹40,000 is exempt from tax liabilities. The ₹40,000 limit was recently raised from ₹10,000 in the 2019 Budget. Above ₹40,000 the banks levy a 10% tax - this is deducted at the source. However, if the bank takes out TDS and your total income falls below ₹2,50,000 per annum, then you can file for a refund with the Income Tax Dept. If your total taxable income exceeds ₹5,00,000 per annum, then you are liable to pay an additional 10% on your FD interest income over and above the TDS levied by the bank. This is since if your total taxable income falls between ₹5,00,000 and ₹10,00,000, this makes your total tax liability 20%. Your liabilities jump another 10% to 30% if your income exceeds ₹10,00,000 - therefore you must in effect pay a 30% tax on your FD interest income. The 10% TDS levied by the bank leaves 20% of interest income to be paid while filing income tax returns. For senior citizens, no TDS is levied by banks for an interest income of up to ₹50,000.
Fixed deposits are flexible and reliable financial instruments. Bajaj Finance Fixed Deposit, available on Finserv MARKETS, offers variable policy tenures. You can pick a plan that matures anytime between 1 year and 5 years. Unlike equity instruments, a fixed deposit account is either a Fixed Income Instrument or a Money Market Instrument. Unlike equity instruments, a fixed deposit account comes with the guarantee of repayment and capital appreciation.
Interest earned from savings accounts are taxable under the ‘Income from Other Sources’ head if the interest earned exceeds the threshold of Rs. 10,000. Similar to Fixed Deposits, the interest earned on Savings Accounts will be taxed as per the tax bracket your total income falls under. Under Section 80TTA of the Income Tax Act, any interest earned upto Rs. 10,000 is eligible for income tax deductions. This applies only to HUFs (Hindu Undivided Families) and non-senior citizens. For senior citizens, this limit is extended to Rs. 50,000. Unlike other fixed income instruments, TDS (Tax Deducted at Source) is not deducted for interest earned on a Savings Account.
Unfortunately, investors cannot avail any deductions on the interest earned on Recurring Deposits (unlike savings accounts and fixed deposits). The interest earned on your recurring deposit is taxable as per your income slab. If the interest you earn exceeds Rs. 10,000, 10% TDS (Tax Deducted at Source) is applicable on that interest, under Section 194A.
Thus, each instrument comes with its own set of tax implications. However, the recent hike in the deduction limit for fixed deposits gives them a clear edge. You can opt for Fixed Deposits on Finserv MARKETS. With competitive interest rates of upto 8.3% for those below 60, you can ensure high returns on your investments. Senior citizens get the benefit of higher interest rates for the exact same policy tenure, deposit amount, and deposit withdrawal frequency. Indian residents over the age of 60 receive an extra 0.25% interest over the rates mentioned in the table above. Therefore, while availing Bajaj Finance Fixed Deposits on Finserv MARKETS, senior citizens can get interest rates as high as 8.95% per annum.
Fixed income instruments are, thus, very low-risk and are suitable to a wide variety of financial goals. You can opt-in for a regular payouts plan if you are looking for something to supplement your monthly income, or perhaps replace it in retirement. If you want to get the maximum returns on your deposit while also enjoying the safety and convenience of such accounts, you can opt-in for longer lock-in periods. This will ensure that you get the highest interest rates.
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