Which Interest Income is Taxable?

Interest earned above a certain limit attracts tax deduction on interest income, but many individuals are not sure how tax is treated or how their interest income is getting charged under tax.

Fixed deposits, savings account, post office schemes, corporate bonds, corporate fixed deposits, recurring deposits earn income interest, which should be reported in one’s income tax return. Tax can be very hard to deal with but it is also unavoidable.

Bank Fixed Deposits are a very popular form of savings. Our money is safely kept in FDs, but seldom do we think about paying tax on the interest income.

Is there any tax impact on your fixed deposit with banks?

Yes, your interest income is chargeable as per your tax slab.

How is interest income taxed?

Interest income from Fixed Deposits is fully taxable. It is added to your total income and taxed at slab rates applicable to your total income. It is shown under the head ‘Income from Other Sources’ in your Income Tax Return.

Understanding TDS – When you receive certain payments the person paying you has to deduct tax before making the payment. This tax deducted is called TDS and it has to be deposited by them to the govt. You receive the net amount. You have to then add the gross amount to your income and adjust TDS against your final tax liability.

Banks deduct TDS on interest income when it is accrued and not when the FD matures & interest is paid out. So if you have a FD for 3 years – banks shall deduct TDS at the end of each year.

How to calculate tax on interest income?

Add interest income to your total income in your Income Tax Return each year (even though it may not be paid out) and calculate your tax liability accordingly – matching it with the yearly TDS deduction at the bank’s end. TDS which has been deducted can be adjusted against your final tax liability.

Even when no TDS is deducted include the interest income in your total income and pay tax on it. Suppose you wait until the maturity of your FD when interest is actually received– your total interest income may push you up a slab and you may end up paying higher tax.

Let’s understand this by way of an example:

Rohit falls in the 20% tax bracket. He has 2 Fixed Deposits with a bank of Rs 1,00,000 each for a period of 3 years @ 7% interest per annum.

In the first year Rohit’s interest income is Rs 7,000 from each of the FDs, total interest accrued is Rs 14,000 in the first year. Bank deducts TDS @ 10% of Rs 700 on both the FDs.

Total interest income of Rohit = Rs 14,000

Total TDS deducted = Rs 1,400.

Total tax payable by Rohit based on his slab rate is Rs 2,800; therefore balance tax payable by Rohit is Rs 1,400.

All taxable interest income needs to be declared in your ITR! Remember this one simple rule and you will never make a mistake. To know which all interest income are taxable, refer the table below.

Understanding TDS in relation to FDs

  • When Bank doesn’t deduct any TDS – if your interest income from all FDs with a bank is less than Rs 10,000 in a year, the bank does not deduct any TDS.
  • When Bank deducts TDS @ 10% – Bank deducts TDS @ 10% from your interest income when it exceeds Rs 10,000 in a year. The bank will estimate your interest income for the year from all the FDs you have with the bank and if it exceeds Rs 10,000, they will deduct TDS @ 10%.
  • When Bank deducts TDS @ 20% – In case you do not provide your PAN information to the bank, they will deduct TDS @20%. So do make sure Bank has your PAN details.
  • No TDS is deductible when your total income is less than minimum amount which is taxable– In the case of housewives or senior citizens it may be possible that their interest income in a year is more than Rs 10,000 but their Total Income (including interest income) is less than the minimum exempt income (Rs 2,50,000 for financial year 2017-18). Since no tax is payable by the individual no TDS should be deducted by the bank. But how will the bank know your total income? The only way to make sure that no TDS is deducted by the Bank is by submitting Form 15G and Form 15H to the Bank. You have to submit these forms at the start of each financial year – this way Bank won’t deduct any TDS and you will be saved from waiting for a refund from the IT Department.

Hope this helps you understand taxes on interest income.


[blockquote style=”1″]”You don’t pay taxes– they take taxes.” ~ Chris Rock[/blockquote]


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