Almost all of us have bank accounts and a majority of us hold at least some balance in fixed deposits. Yet many taxpayers fail to report interest income in their tax return. Not all types of interest income are subject to TDS and that leads to further confusion about whether such income is taxable at all. Here we will dispel some myths around the taxability of interest income.
Is interest income taxable?
Almost all types of interest income – from savings accounts, fixed deposits, recurring deposits, post office savings schemes – are taxable. Interest income from corporate bonds is taxable too. TDS is deducted on fixed deposit interest income and also on interest earned from recurring deposits when it exceeds ₹10,000. Banks aggregate interest income from all branches to check whether it exceeds the ₹10,000 limit to become eligible for TDS deduction. However, fixed deposit interest income is taxable even if it is below the ₹10,000 threshold and the bank does not deduct TDS. Savings account interest is never subject to TDS, but it is fully taxable as well. So TDS deduction is not a criterion for determining whether your interest income is taxable or not.
Where to report interest income?
Interest income is reported under the residual head of income called "income from other sources". Deduction section 80TTA is available for interest income from savings bank accounts. A maximum of ₹10,000 can be claimed under this section. Do note this deduction is not allowed on interest from fixed deposits or recurring deposits.
Almost all types of interest income – from savings accounts, fixed deposits, recurring deposits, post office savings schemes – are taxable.
How to include interest income in your return?
An income tax return is filed for a financial year. And all incomes are reported and offered to tax for a 12-month period that ends on 31 March. However, interest earned by you may not exactly belong to this time period. You'll have to calculate interest that belongs to the financial year you are filing a return for.
Fixed deposit interest: You can use Form 16A provided to you by the bank or look up TDS entries in your Form 26AS to find out interest for the financial year and the TDS deducted on it. Include the interest income mentioned on these forms (Form 16A or Form 26AS) in your return.
If for some reason no TDS was deducted, you can look up your FD statement online via net banking and search it for interest credits. Banks deduct TDS, even though interest is not immediately paid to you. Say a fixed deposit is for a five-year term, TDS is deducted and deposited by the bank each year for the FD's term. Suppose you wait until the maturity of your FD when interest is actually credited to your account. Including such a consolidated amount may push you up a slab and you may end up paying a higher tax on it. So it is wise to include interest each year in your income and pay tax on it.
If you do not report the interest income you earn, you may not be able to take credit of TDS deducted against it.
Savings account interest: Now the more tricky part of how to include interest income from a savings account in your return. You won't find this income on Form 16A or Form 26AS. And sometimes the bank credits interest for a quarter or it is credited bi-annually. You'll have to estimate interest income yourself using simple calculations.
Here's an example:
Suppose your bank statement has two interest credits – ₹30,000 for 1 Jan to 30 June 2015 and another of ₹12,000 for 1 July to 31 December 2015. Interest for the next period of six months of 2016 has not yet been credited. How much income should you include in your return for FY 2015-16?
You can calculate interest for April to June 2015 by dividing ₹30,000 by 2 and take interest for Q1 2015 as ₹15,000. Interest for the next period is ₹12,000. Now, how to arrive at interest for the remaining period (1 January to 31 March 2016)? You can assume it to be half of ₹12,000 or another reasonable amount. And in the next financial year, make sure that whatever is remaining from the six months interest is included in the next year's return and offered to tax.
This way you can use any reasonable basis to estimate your savings account interest and include it in your return.
How to treat TDS?
Any TDS deducted on your income can be adjusted from your final tax liability. Do make sure you have included its corresponding income in your tax return. The IT Department allows TDS to be adjusted against tax payable where the income on which it has been deducted has been reported. If you do not report the interest income you earn, you may not be able to take credit of TDS deducted against it. It is preferable to take credit of interest in the year in which it is deducted – this way the timing of your income inclusion and taxes paid on it match with TDS deduction at the bank's end.