Reviewed by Sep 30, 2020| Updated on
Tax-exempt interest refers to the interest income that is not subject to Indian income tax in the first instance. There are cases where the sum of tax-exempt interest that a taxpayer earns could limit the taxpayers qualification for other tax breaks.
Such interest income that is not part of the total income going to be subject to tax is classified as tax-exempt interest. The Income Tax Act has specifically mentioned in its provisions, i.e. the cases of tax-exempt interest. Since tax-exempt interest is not subject to income tax, it is not included in the gross total income for taxation purposes.
Had there been no provisions to exempt the income from the interest earned on specific instruments or investments, then these would be subject to tax. Section 10 of the Income Tax Act mentions particular cases of interest income earned that is exempt from income tax.
It must be noted that not all interest income is exempt or tax-free under the Indian Income Tax law.
Persons mentioned in Section 10 for tax-exemption on their interest income will be eligible not to pay tax on such interest income. Most commonly, any interest, premium, or redemption on any securities or certificates issued by the government or deposits maintained with the government are exempt from income tax.
In the case of a non-resident, the interest on securities and bonds as notified by the government in the official gazette are exempt from tax. It includes premium on the redemption of such bonds. Also, any interest standing as a credit in the non-resident (external) account in any bank is tax-exempt interest. Further, interest on savings certificate issued before 1 June 2002 will be exempt for a non-resident.
The tax assessee must report the interest income that is exempt from taxes in his/her income tax return, precisely under the head 'Income from Other Sources as a separate line item.