Types of Interest Income and Applicable Taxation

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.

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