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 is subject to TDS and that leads to further confusion about whether such income is taxable at all. Let’s dispel myths around taxability of interest income and understand how to offer it to tax.
Is interest income taxable?
Usually all types of interest income is taxable. Savings account interest, fixed deposit interest, recurring deposit interest and interest from post office savings scheme are all 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 Rs 10,000. Banks aggregate interest income from all branches to check whether it exceeds Rs 10,000 limit to become eligible for TDS deduction. However, fixed deposit interest income is taxable even if it is below the Rs 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 criteria 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 under section 80TTA is available for interest income from savings bank account. A maximum of Rs 10,000 can be claimed under this section. Do note this deduction is not allowed on fixed deposit or recurring deposits interest.
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 31st 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 an FD is for a 5 year term, TDS is deducted & 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 higher tax on it. So it is wise to include interest each year in your income and pay tax on 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 2 interest credits Rs 30,000 for 1st Jan 2015 to 30th June 2015 and another of Rs 12,000 for 1st July 2015 to 31st December 2015. Interest for the next period of 6 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 Rs 30,000 by 2 and take interest for Q1 2015 as Rs 15,000. Interest for next months is Rs 12,000. Now how to arrive at interest for the remaining period 1st January 2016 to 31st March 2016. You can assume it to be half of Rs 12,000 or another reasonable amount. And in the next financial year make sure, whatever is remaining from the 6 months interest is included in 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.
This article was published by ClearTax on Huffington Post on 19th July 2016 here.