Your Interest Income from all Saving Bank Account is Taxable if it crosses 10K
Interest-bearing investments such as savings accounts, fixed deposits, and recurring deposits are go-to options for risk-averse investors. All of these popular investment options generate an interest income, which is usually not related to the market conditions.
Interest income is the amount paid to an entity for lending its money or letting another entity use its funds. On a larger scale, interest income is the amount earned by an investor’s money that he places in an investment or project. Such income is generally taxable. However, the income tax law provides for certain exemptions on such income. Such exemption is distinguished for individuals and senior citizens separately.
Under what head is interest income taxed in the Income Tax Returns?
Interest that gets accumulated in your savings bank account, fixed deposit and recurring deposits must be declared in your tax return under income from other sources.
Is any exemption availability on taxability of interest income?
The income tax law provides for certain exemptions on interest income which is distinguished for individuals and senior citizens separately. These exemptions are covered under Section 80TTA and Section 80TTb of the Income Tax Act.
What is deduction under section 80TTA?
Section 80TTA provides a deduction of Rs 10,000 on interest income. This deduction is available to an Individual and HUF..
This deduction is allowed on interest earned:
- From a savings account with a bank
- From a savings account with a co-operative society carrying on the business of banking
- From a savings account with a post office
This deduction is not allowed on interest earned on time deposits:
Deduction under Section 80TTA shall not be allowed for:
- Interest from fixed deposits
- Interest from recurring deposits
- Any other time deposits
Earlier, this deduction was available to everyone irrespective of their age, i.e., to individuals aged below 60 years, senior citizens, and super senior citizens.
However, with effect from financial year 2018-19, senior citizens cannot claim deduction under this section. Post Budget 2018, section 80TTA has been amended which restricts senior citizens from claiming any deductions on interest received on savings account either with bank or post office under this particular section. However, they can claim deduction up to Rs 50,000 for interest received from savings account and fixed deposit with banks and post office under the newly inserted section, i.e., section 80TTB.
What is Section 80TTB?
Section 80TTB which was applicable w.e.f 1 April 2018 is a provision whereby a taxpayer who is a resident senior citizen, aged 60 years and above at any time during a financial year claim a deduction of lower of Rs 50,000 or an amount from a specified income from his gross total income for that FY.
Specified income is any of the following income in aggregate:
- Interest on bank deposits (savings or fixed);
- Interest on deposits held in a co-operative society engaged in the business of banking, including a co-operative land mortgage bank or a co-operative land development bank; or
- Interest on post office deposits
Who is considered as a Senior Citizen in India?
According to the law, a senior citizen is an individual resident between the age group of 60 to 80 years, as on the last day of the previous financial year.
Who is considered as a Super Senior Citizen in India?
A super senior citizen is an individual resident who is above 80 years, as on the last day of the previous financial year.
ALSO READ How much Interest Income is Exempt for Senior Citizens and Individuals in Income Tax?
Let us refer to the below summary to find out what interest incomes are taxable and what are exempt:
Interest income on a Fixed Deposit – The interest income on a Fixed Deposit is taxable, and one has to pay taxes as per the applicable tax slab rates. Moreover, the bank also deducts TDS on this income, although TDS is cut only when interest income exceeds Rs 10,000 in any given fiscal year. Moreover, the exemption limit for senior citizens is Rs 50,000 under Section 80TTB. One can also avail of exemption on TDS by filing Form 15G (15H for senior citizens) if your overall taxable income from all sources is below the respective exemption limit.
Interest income on savings account – Interest income on savings account up to Rs 10,000 (Rs 50,000 for senior citizens), is exempt. However, any interest income on Savings Account above Rs 10,000 is taxable as per applicable slab rates. To calculate the exemption limit, interest income from all the accounts are added, including bank Savings Accounts, post office Savings Accounts, and co-operative bank Savings Accounts.
Interest income on Recurring Deposit – The interest income earned on Recurring Deposit is fully taxable without any deduction unlike that of a Savings Account. Moreover, as per Section 194A, banks also deduct TDS on Recurring Deposit interest income at 10%.
Interest income on Corporate Bonds
Corporate bonds issued by public or private companies are taxable as per slab rates on an accrual basis. The interest income on bonds is included in ‘Income from other sources’, whereas the profit/loss from the sale of bonds is taxable under capital gain. However, interest income on tax-free bonds is exempt from tax under Section 10(15) of the Income Tax Act, 1961. These are mostly government bonds or bonds from public undertakings like Indian Renewable Energy Development Agency, etc.
Interest income on Public Provident Fund (PPF)
PPF falls under the Exempt-Exempt-Exempt (EEE) category. Interest earned from PPF is fully exempted from tax without any limits. The interest is compounded annually on PPF, with the calculation done every month. The interest earned as well as the withdrawals from PPF are tax-free.
Why you should report interest income in ITR?
Interest that gets accumulated in your savings bank account, fixed deposit and recurring deposits must be declared in your tax return under income from other sources.
Though interest earned from fixed deposits, recurring deposits, even tax-saving bank deposits and infrastructure bonds, is taxable, people often do not report any interest income below Rs 10,000. The exemption of Rs 10,000 a year under Section 80TTA applies only to the interest earned on the balance in a savings bank account. Even then, the assessee is supposed to declare it in ITR and then claim the deduction.
Another common misassumption is that one need not pay tax as TDS has been deducted on the income. People forget is that the tax deducted by the bank at source is at a flat rate of 10%. However, tax slabs may vary. So, if the assessee falls in a higher tax slab, their liability may be more and you will have to pay the balance while filing returns.
Many assessee’s forget to re-calculate their liability and end up with a notice, paying higher taxes with interest and penalties. The department can catch such mistakes by matching your ITR with Form 26AS. It tracks the deposits and interest income where TDS has not been deducted, that is, where you have submitted Form 15 G/H.
What is the penalty of under-reporting the interest income
If the income assessed/ re-assessed exceeds the income declared by the assessee, or in cases where return has not been filed and income exceeds the basic exemption limit, penalty at 50% of tax payable on such under reported income shall be levied.
Penalty will be 200% of the tax is payable if under-reporting results from misreporting of income
What is the penalty if the interest income is not disclosed at all?
Where the income determined includes undisclosed income, a penalty @10% is payable. However, no such penalty will be leviable, if such income was included in the return and tax was paid before the end of the relevant previous year.
Where Search has been initiated on/ after 1/7/2012 but before 15/12/2016:
- If undisclosed income is admitted during the course of search and assessee pays tax and interest and files return, a penalty @ 10% of such undisclosed income is payable.
- If undisclosed income is not admitted but the same is furnished in the return filed after such search, 20% of such undisclosed income is payable.
- In all other cases, penalty is leviable @ 60%
Where Search has been initiated on/ after 15/12/2016,
- If undisclosed income is admitted during the course of Search and assessee pays tax and interest and files return, a penalty @ 30% of such undisclosed income is payable.
- In all other cases, penalty is leviable @ 60%
