Understanding Tax on Interest Income: Rates & Deductions

Certain investments, like fixed deposits, help generate some interest income. This falls under the head of ‘Income from Other Sources’ or the residuary head of income.

Under the Income Tax Act, 1961, this type of income attracts taxes on the interest earned. But the tax depends on the instrument through which you earned the interest income. It will also depend on whether the investment is eligible for any tax deductions.

Tax Levied on Interest Earnings

Here is how tax is levied on interest income across different types of investments:

1. Interest from Fixed Deposits (FDs) and Recurring Deposits (RDs)

FDs and RDs are among the most popular investment options. But the interest you earn from these instruments is taxable under Section 194A. Here are some of the key provisions of this section:

The issuer deducts 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
If your total income falls below the limit, avoid TDS by submitting forms 15G or 15H (if senior citizen)
The standard TDS deduction rate is 10%
The TDS rate goes up to 20% if you do not furnish a PAN card

2. Interest from Savings Accounts

You can earn interest at a certain rate on funds deposited in a savings account. Here are the details for tax applicability on such income:

The interest amount earned on a savings account directly adds to your income
The interest is taxed as per the applicable tax slab
The interest is subject to deduction as per Section 80TTA for individuals under 60 years
The interest earned by senior citizens is subject to deductions under Section 80TTB
The minimum deduction for non-senior citizens and HUFs is ₹10,000; it is ₹50,000 for senior citizens

3. Interest from Public Provident Fund (PPF)

PPF allows you to earn interest on your investment. The maximum contribution you can make in a financial year is ₹1.5 Lakhs. This can be claimed under Section 80C. Here are some provisions for income tax on PPF interest:

It comes under the Exemption- Exemption- Exemption (EEE) category
It is exempt from taxes for the principal amount, interest earned, and maturity amount

4. Interest from Bonds

Private and public companies issue bonds where you earn interest through the coupon rate. Here is the tax applicability on interest earned from these investment instruments:

If the bond is tax-free, interest income exemption norms may be applicable
For all other bonds, the interest income gets taxed as per the applicable slab rates

Which interest is taxable?

As per the Income Tax Act, 1961, interest income from certain investments are taxable. These include savings accounts, deposits, and bonds.

Is there a tax deduction on interest income?

Yes, there is a tax deduction available on the interest you earn. But the applicable deduction depends on the investment you generate the interest from.

How much tax do I pay on interest income?

The tax paid on the interest depends on the amount earned and the deduction applicable. If deductions are available, the interest amount after is taxed as per the Income Tax Act, 1961.

Under which head is interest income taxed?

Interest income falls under the heading ‘Income from Other Sources.’ The deductions applicable falls under the head for deduction under a specific section

Is interest on income tax refund taxable?

The Income Tax Act considers the interest on income tax refund as part of your income. It is taxable as per the relevant provisions.

How to calculate income tax on savings bank interest?

Here is how to calculate tax on interest earned from savings accounts. First, determine the total amount you earned in a financial year. Then, subtract any deductions applicable under the Income Tax Act. The remaining amount will be taxable as per your tax slab rate.

How to calculate tax on interest income?

Tax implications on interest income depend on the type of investment you choose.

How much interest on a fixed deposit is free?

The Tax Deducted at Source (TDS) is not applicable if your annual interest income is below ₹40,000 in a fiscal year. The limit is extended to ₹50,000 for senior citizens.