Just like tax is levied on your income, you are required to pay tax on your interest earnings as well. Crores of Indians have a savings account, and invest in bonds, fixed deposits, recurring deposit or RDs, and post office schemes. They earn interest on this investment, which comes under the ambit of taxation. However, many taxpayers are unaware about this, which is why they do not show these earnings in their returns.
Before we see how interest is taxed in your earnings, let’s understand from an expert why it is important to show interest earnings in your ITR.
Chartered accountant Vinod Rawal says all types of interest income has to be shown in the returns, even though the interest income is only accrued income. These have to shown under the head ‘income from other sources’. And taxes need to be paid on them, he says.
Almost every individual has a savings account. In fact, some people have several savings accounts. In such a case, people might end up earning a substantial amount as interest. Under section 80TTA of the Income Tax act, annual interest earnings of up to Rs 10,000 on a savings account are tax free. This limit is not separate for each savings account, but rather the total of all interest earned on all savings accounts together. This exemption applies to individuals aged 60 or less, and HUFs, or Hindu Undivided Family. Tax will be levied if the interest earned is more than Rs 10,000.
The taxpayer is required to show interest earnings from all their savings accounts within a financial year in his ITR under the head Income from other sources. The interest amount is added to your total income, and then, depending on the applicable tax slab, you are required to pay taxes.
Interest earned on fixed deposits or FDs comes under the ambit of taxation. Senior citizens, or those aged 60 or above can claim a deduction of up to Rs 25,000 on interest earned on FDs. In order to claim this deduction under section 80 TTB of IT act, one should show this interest in the ITR. Individuals aged below 60 are not eligible for this deduction.
If the interest on FD exceeds a certain limit, the banks also deduct TDS at the rate of 10%. For senior citizens, this is capped at Rs 50,000, and for non-senior citizens, or those aged below 60, this limit stands at Rs 40,000. If your total income, including interest falls below the basic exemption limit, you can file form-15G/15H to stop your TDS from being deducted.
Under the old tax regime, for taxpayers aged 60 or less, the basic exemption limit is Rs 2,50,000. For those aged 60 and above, or senior citizens, the limit is Rs 3,00,000, and for super senior citizens, or those aged 80 years or above, this exemption limit is Rs 5,00,000. Under the new tax regime introduced in 2023-24, the basic exemption limit is Rs 3,00,000
Interest received on small savings schemes like recurring deposits or RD, Kisan Vikas Patra or KVPs and National savings certificate or NSC also attract tax. The interest is added to your total income, and then, depending on the applicable income tax, you will have to pay taxes.
Hiding these incomes has now become almost impossible, since the income tax department gets to know of all income from the taxpayers Annul Income Statement, says Rawal. The non-payment of taxes on interest income is considered tax evasion by the I-T department, he adds.
Similarly, senior citizen savings scheme is a popular investment scheme amongst senior citizens. Investing in it yields them interest on regular intervals. If your total income, including your interest earnings fall below the basic exemption limit, no tax will be levied.
Public Provident Fund, or PPF is one of the few savings scheme that falls under the EEE or exempt-exempt-exempt category. This means that the amount of principal, interest and that received on maturity are entirely tax-free.
Not just this, interest earned on bonds issued by government and private companies is also taxable. However, interest received under tax-free bonds are tax-exempt as per IT rules. Interest earned on SGBs or sovereign gold bonds is also taxable.
So, you must have understood why it is important to furnish your interest earnings in your ITR. You can find all information related to your interest earnings in your Annual Information Statement or AIS. If you choose the old tax regime, you can claim deductions under 80TTA, 80TTB, 80C and 80D on your income. If you have wilfully hidden your interest earnings details in your ITR, it is advisable to revise your ITR by 31st December 2023, and pay applicable taxes. In the same way, if you have forgotten to show any of your earnings in the past two years, you can file an updated return.
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