When we are talking about the computation of income tax our main discussion is about income from salary or profit from the business. And there is no surprise for that. These two heads are the main source of generating income for maximum people.
According to the Income Tax Act, there are 5 heads of income and they are:
- Income from Salary
- Income from House Property
- Profits & Gains of Business or Profession
- Capital Gain
- Income from Other Sources.
At the time of return filling, we generally concentrate on income from salary or profit. But we can’t forget about interest income.
Interest income falls under the income from other sources. You can’t compute your income tax properly if you do not consider your interest income. And if you ignore it or remain it undisclosed, you may face some serious problems. Let us discuss it:
- 1 Types of interest income
- 2 Interest from Savings Bank Account
- 3 Interest from Fixed Deposit
- 4 Interest on Recurring Deposits
- 5 Post Office Monthly Installment Scheme Account (POMIS)
- 6 Senior Citizen Savings Scheme
- 7 Tax Planning for your Interest Income
- 8 Penalty for Undisclosed Interest
Types of interest income
Basically, there are five types of interest income which has a great impact on our tax computation, and they are:
- Interest on Savings Bank Account
- Interest on Fixed Deposit
- Recurring Deposit
- Interest from Monthly Installment Scheme (Especially for Senior Citizen)
- Senior Citizen Savings Scheme
Except above there are other interest incomes also like interest from PPF, interest from Sukanya Samridhi Scheme, etc.
Interest from Savings Bank Account
The savings account is a very popular option for all the people to save their money. It is very easy to deposit your money in savings account. And you can easily withdraw it either from the bank or from ATM counter through the debit card.
But if you think about interest then there is some question must arise. Your savings account does not provide you with sufficient interest. This is because the interest rate is very low.
The interest rates offered by various banks are different and varies from bank to bank. Earlier, it was 4% (Irrespective the amount of money kept in the bank).
However, on 25th October 2011, it has been decided to deregulation of savings bank interest rate. After deregulation, banks are free to determine the savings account interest rates subject to the following conditions:
- Each bank will have to offer a uniform interest rate on savings bank deposits up to Rs. 100000, irrespective of the amount of money kept in the bank.
- For savings bank deposits above Rs. 100000, a bank may provide differential interest rates.
However, the above guideline is applicable for resident individual only.
Computation of Interest
Earlier, the interest on savings bank account was calculated on the minimum balance between 10th and last day of the month. Any deposits during this period were not taken into account but the amount of withdrawals was taken into account.
For example, the balance of your savings account on 10th March was Rs. 10000. On 15th you have deposited Rs. 5000 in your account. On 31st March, the balance of your account was Rs. 15000 but the interest would be calculated on Rs. 10000 as it was the minimum balance during the period.
In case you have withdrawn Rs. 7000 on 25th March, then the balance will be Rs. 8000. This amount would be considered for interest calculation as it was the minimum balance during the period.
As you can see it was totally unfair.
From April 2010, this method was changed. The interest on the savings bank account is now calculated based on the daily balance method. Therefore, you can get maximum benefit from your account because you can earn interest on your maintained closing balance per day.
How? Let us see the following example:
The opening balance of your savings account on 1st March was Rs. 10000. On 21st March, you have deposited Rs. 5000. On 28th March, you have withdrawn Rs. 3000. According to the current rule, you will earn interest on Rs. 10000 for 20 days, on Rs 15000 for 7 days and on Rs. 12000 for 4 days. All the above balances are the minimum balance as maintained by you for a particular day.
Deduction u/s 80TTA
An individual or HUF can avail deduction under section 80TTA in respect of interest on deposit in the savings account. The amount of deduction is Rs. 10000 (Maximum deduction you can avail under this section)
For example, if your interest income from the savings account is Rs. 18000, you are eligible for deduction under section 80TTA of Rs. 10000. On the other hand, if your interest income is Rs. 7500, you are eligible for Rs. 7500 and not for Rs. 10000.
However, this section is not applicable only for saving bank account. You are eligible for the following accounts:
- Saving Bank Account
- Savings account with a Co-operative Society engaged in the business of banking, and
- Post Office Saving Account
It may also be noted that if you want to avail deduction under this section, you must disclose your interest income in your return. At first, it will be included in your total income; thereafter the deduction will be allowed.
From Assessment Year 2019-20, a new section 80TTB will be introduced. It is only for senior citizens. According to this section a deduction up to Rs. 50000 shall be allowed on interest on deposits. However, the deduction under section 80TTA shall not be allowed to the senior citizens from Assessment Year 2019-20.
Interest from Fixed Deposit
For a long time “Fixed Deposit” is a popular investment option for everyone. Investor, who does not want to take any risk, can invest in fixed deposit. It is totally safe. If you compare it with the savings account, you will get more interest.
Interest rates of FD
Interest rates on FD are varied from bank to bank. Again, the interest rate depends on the period of the fixed deposits. Further, the interest rate of an amount less than Rs. 1 crore is different than the interest rate of Rs. 1 crore or more.
It may also be noted that the interest rate given to regular citizen and a senior citizen are not the same. Let us take an example of SBI term deposit. The below chart showed the interest rates of FD in SBI for an amount of investment less than Rs. 1 Crore.
|Days/Year||Regular Citizen||Senior Citizen|
|7 Days to 45 Days||5.75%||6.25%|
|46 days to 179 days||6.25%||6.75%|
|180 days to 210 days||6.35%||6.85%|
|211 days to less than 1Year||6.40%||6.90%|
|1 year to less than 2 year||6.80%||7.30%|
|2 year to less than 3 years||6.80%||7.30%|
|3 years to less than 5 Years||6.80%||7.30%|
|5 years and up to 10 years||6.85%||7.35%|
So, you can see that there is no fixed interest rate. For a different investment period, a different interest rate is applicable. Again, for senior citizens, the interest rate is little high.
TDS on interest from FD
Like the savings account, there is no such deduction from interest on FD. If the amount of interest exceeds Rs. 10000 during a financial year, TDS @ 10% will be deducted from that amount. (From Assessment Year 2019-20, there will be no TDS on interest income up to Rs. 50000 for senior citizens)
Now, there is a story. Let you have 3 FD in SBI. If the total aggregate amount of interest exceeds Rs. 10000, then the TDS will be deducted. See the following table:
|Scenario A||Scenario B|
|Bank||FD’s||Amount of Interest||TDS @ 10%||Amount of Interest||TDS @ 10%|
|Total||Rs. 11000||Rs. 1100||Rs. 8000||Nil|
You can see that the TDS is deducted on total amount as you have all the FD’s in the same bank (Branch may be different). When the total interest of all FD’s of the same bank is more than Rs. 10000, TDS will be deducted (Scenario A). If the total interest of all your FD’s is less than Rs. 10000, no TDS will be deducted (Scenario B).
Now, you have 3 FD’s in separate banks, like SBI, UCO, and UBI. In that case, the bank will deduct TDS individually. In this case, each bank will consider interest income separately. Let us see the following table:
|Bank||FD’s||Amount of Interest||TDS @ 10%|
It is very clear that each bank will consider interest income separately and TDS will be deducted by each bank separately.
Form 15G and 15H
It may also happen that your tax on total income is nil but the interest on FD’s is Rs. 10000 or more. In that case, the bank will deduct TDS.
That will give you an extra burden. If you want a refund that TDS amount, you have to file your return related to that particular financial year.
In that situation, you can submit form 15G or 15H to the particular bank for nil or lower deduction of TDS. These are one types of self-declaration form. Form 15G belongs to the regular citizens and Form 15H belongs to the senior citizens.
Interest on Recurring Deposits
Recurring deposit is another popular investment option for everyone. It is very much helpful for those who have a regular income. A fixed amount will be deposited every month in the recurring deposit account. The interest rate is higher than that of the savings account and a little less than that of the FD.
Interest Rate of RD
Like FD, the interest rate of RD is also varied from bank to bank. You can also open you RD account in a post office also. The amount of interest is compounded quarterly.
The minimum period of RD is 6 months and the maximum is 10 years. The interest rate is varied from 5.75% to 8.50%. It depends on the bank where you will open your RD account. Again, the interest rate depends on the period of the recurring deposit. Further, the interest rate is different for regular citizens and senior citizens. Let us see the following table (Interest rates of RD in SBI)
|Period||Normal Rates||Rates for Senior Citizens|
|1 year to 1 year 364 days||6.80%||7.30%|
|2 years to 2 years 364 days||6.80%||7.30%|
|3 years to 4 years 364 days||6.80%||7.30%|
|5 years to 10 years||6.85%||7.35%|
These interest rates are varied from bank to bank. Like in HDFC, you can get different interest rates for different months (For 6 months 6.25%, for 9 months 6.75% and so on)
If you want to compare all banks RD rates, you can visit myloancare.in.
Tax on RD
TDS is applicable on the interest income. If interest from RD exceeds Rs. 10000 in a financial year, 10% TDS will be deducted. To avoid TDS, you can submit Form 15G/15H
Post Office Monthly Installment Scheme Account (POMIS)
If you are looking for a safe and secure monthly income, POMIS is best for you. Actually, this scheme is designed for those who are risk-averse. It is mostly useful for the senior citizen or retired people who want a hassle-free income for the future.
Interest rate of POMIS and other key features
From 01-01-2019, the interest rate is 7.70% per annum. However, you will get income every month.
The maturity period of MIS is 5 years. The minimum investment amount is Rs. 1500. The maximum investment amount is Rs. 450000 for a single account holder and Rs. 900000 for a joint account.
The following Key features are useful
- The account can be transferred from one post office to another.
- One person can open any number of account (Up to the upper limit i.e. Rs 450000/Rs.900000)
- Nomination facility is available.
- The maturity amount after 5 years can be reinvested
- Pre-matured withdrawn can be made after 1 year but before 3 years with 2% deduction from the deposit amount and after 3 years but before 5 years with 1% deduction from the deposit amount.
- The account can be opened in the name of minor also.
Tax on interest on POMIS
Unlike FD or RD, there is no TDS on interest income. It does not mean that there is no tax. It is taxable in the hand of the investor. Further, the deduction under section 80C is not available on your deposits.
Senior Citizen Savings Scheme
This scheme is very much popular among the senior citizen or retired person in India. As the name suggests, it is only for senior citizens in India. However, there are a few eligibility criteria. The following persons are eligible for SCSS:
- Senior citizens of India i.e. the age must be 60 years and above.
- Retired persons with the age of 55 years or more. Here retired person means those who have retired on superannuation or by VRS.
- Retired defense personnel with a minimum age of 50 years.
SCSS has the following key features:
- The maturity period is 5 years.
- You can open the account under this scheme in both post office and bank.
- The minimum deposit amount is Rs. 1000 and the maximum deposit amount is Rs. 1500000.
- A person can open multiple accounts (Total deposit amount can’t exceed Rs. 1500000)
- Premature withdrawal facility is available subject to certain deduction. Pre-matured withdrawal can be made after 1 year but before 2 years with 1.5% deduction from the deposit amount and after 2 years but before 5 years with 1% deduction from the deposit amount.
Interest rate and tax on it
At present, the interest rate is 8.70% per annum. Interest is paid quarterly.
The interest rate is not tax-free. At present, TDS @ 10% will be deducted if the amount of interest is more than Rs. 50000. To avoid TDS, you can submit Form 15H. However, the amount deposited is also allowed for income tax deduction under section 80C.
Tax Planning for your Interest Income
It is really important to make a good tax planning for your interest income. As I have said you earlier that the interest income comes under the head income from other sources. At the time of return filling, you have to disclose your interest income. Read the following point carefully for better tax planning:
- I already told you about the interest on savings account. This interest is taxable. Again, you are eligible for deduction under section 80TTA. Remember, it is a deduction and not an exemption. So, at first, you have to include it in your return then you can claim the deduction.
- There are other sources of interest income like PPF, Sukanya Samridhi etc. These incomes are exempt from tax.
- There is a TDS on FD, RD etc. The rate is 10%. BEWARE! If you do not provide your PAN to the bank, that rate will be 20%.
- You can submit form 15G/15H. But my dear friend, everyone can’t submit these forms. 15H can be submitted if the amount of your income tax is NIL. On the other hand, 15G can be submitted by fulfilling two conditions. 1) Nil Income Tax and 2) Total income (including interest income) before deduction does not exceed basic exemption limit.
- You have to furnish Form 15G/15H every year. These forms are valid only for one financial year.
- Always follow 26AS in your income tax profile. You can easily come to know about all the amount of TDS deducted from your income.
Penalty for Undisclosed Interest
- There are several sources from which interest is generated. But we ignore them at the time of return filing. For example, Interest from Income Tax Refund, Interest from FD linked with Bank Locker, etc. You have to disclose it.
- If you do not disclose your interest income, that will be declared as tax evasion. A penalty under section 271 (1) (c) may be attracted. This penalty will be imposed on underreported or misreported income. The amount of penalty shall be 50% of the tax payable on underreported income. However, in the case of misreporting, 200% of the tax payable on such misreporting income will be imposed.
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