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Everything you wanted to know about Tax on Interest Income

ClearTax
ClearTax helps Individuals prepare and file their Income Tax Returns online in India. www.cleartax.in
tax

Several tax payers are unsure about how to treat their interest income. Whether it must be offered to tax. What about TDS which is deducted on it. Understanding how deduction under section 80TTA applies to interest income. Let’s take a look.

How to report Interest Income? Interest income may be earned from – savings bank account, post office savings account, fixed deposits and recurring deposits. Interest income from savings and post office accounts is credited to your bank account. Interest income from fixed deposits is either credited to your account or reinvested in the deposit. As a thumb rule, all interest income from any of these sources must be reported in your income tax return. It is added to your total income and taxed at the slab rate applicable to you. Add it under the head ‘income from other sources’. If interest income for a year is reinvested in the deposit and is paid on maturity, it is wise to include it in your income tax return for that year and pay tax on it each year rather than on maturity.

TDS on Interest Income? Banks do not deduct TDS on interest from savings account. So far as fixed deposits are concerned, starting 1st April 2015, the bank will sum up interest you earn from all the fixed deposits held by you in its branches; if this exceeds Rs 10,000, TDS will be deducted on it @ 10%. If the bank does not have your PAN details, TDS will be deducted @ 20%. The same treatment shall be applicable to interest income from recurring deposits effective 1st June 2015. The bank deducts TDS on interest income each year, even when it is not paid and is reinvested. You can find out details of your TDS here in your Form 26AS.

Any interest paid or interest accrued but not paid must be added to your total income for the year. Now take credit of the TDS which has been deducted by the bank. Total tax calculated less TDS already deducted will be the final tax payable by you or there could be a refund if the bank has deducted higher TDS. You can claim this refund by filing an income tax return.

Can I submit Form 15G & 15H? If your total income is less than the minimum amount which is subject to tax (Rs 2,50,000 for FY 2014-15 and FY 2015-16) you can submit Form 15G & 15H. These forms are a declaration that your total income is less than the taxable amount and therefore no TDS should be deducted on your interest. You can read in detail about these forms here. Do note that this is not a way to save tax on interest income but only a means to prevent TDS deduction on it. It saves you from the hassle of seeking a refund later.

Deduction under section 80TTA? This deduction is available on interest from savings bank account or post office savings account. The deduction is the lower of interest earned or Rs 10,000. Do note that the deduction is not applicable for interest from time deposits or interest income from FDs or RDs. When you file with ClearTax we automatically give you this deduction.

Let’s understand by way of an example – Anand has an income of Rs 8,000 from his savings bank account. He also holds a deposit of Rs 2,50,000 on which he earns an interest @ 6%. The bank has deducted TDS on his FD interest @ 10%. Anand’s total income is taxable at a slab rate of 20%.

This is how Anand will disclose his income -

Income from Other Sources

Interest income from savings account                                                                                       Rs 8,000

Deduction under section 80TTA (lower of interest earned or Rs 10,000)                                  Rs 8,000

Interest income on fixed deposits                                                                                              Rs 15,000

Total Income from Other Sources                                                                                           Rs 15,000

 

Tax on interest income from savings account                                                                            Nil

TDS deducted on interest income from FD                                                                                Rs 1,500

Balance Tax on interest on fixed deposit                                                                                                         1,500

An amount of Rs 15,000 shall be added under income from other sources. Anand will pay additional tax of Rs 1,500 on it.