The interest you earn is considered an additional source of income and, like any other source of income, is taxed according to the country’s Income Tax regulations. Means, the income earned on your investment is subject to tax if it exceeds the government’s set threshold. You can decrease your tax liability by taking advantage of the several tax savings provided under the Income-tax Act, 1961. But first, you must understand how interest income is taxed. Let’s take a look at how interest income is taxed.
These are the things to know about interest income taxation.
Interest income of FDs
Interest earned on a fixed deposit is taxable, and you must pay taxes according to the IT Act’s appropriate tax rates for the financial year. Furthermore, when interest income on fixed deposits reaches Rs 40,000 (Rs 50,000 for senior citizens) in any given financial year, banks deduct tax at source (TDS). Banks charge a 10% tax on earnings over Rs 40,000, which is deducted at the source. NRIs are subject to TDS at the rate of 30% plus applicable surcharge and cess.
If your total taxable income from all sources is less than the maximum amount not chargeable to tax, you can get a TDS exemption by filing Form 15G (15H for senior people). Section 80TTB allows senior citizens to deduct up to Rs 50,000 in interest income.
If your bank deducts TDS and your total income is less than Rs 500,000 per year, you may be eligible for a refund.
Interest income of RDs
There are no tax advantages available on investments in recurring deposits. On the interest collected from recurring deposits, income tax must be paid. The tax must be paid at the rate of the RD holder’s tax bracket.
Recurring deposits are subject to TDS (Tax Deducted at Source). It is deducted at a rate of 10% on interest earned over Rs 40,000. On interest generated up to Rs 40,000, however, no TDS is deducted.
Interest income of PPF
You are not obligated to pay any taxes on interest income earned from a Public Provident Fund (PPF) because it is totally exempt. The Exempt-Exempt-Exempt (EEE) arrangement applies to PPF. As a result, the deposit, the interest received, and the amount withdrawn are all tax-free.