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Heads of income
The Income Tax Department breaks down income into five heads of income for the purpose of income tax reporting:
- Income from Salary
- Income from House Property
- Income from Capital Gains/Loss
- Income from Business and Profession
- Income from Other Sources
Income from Other Sources covers income that’s not covered in any of the heads of income.
Interest income – be it from a savings bank account or a fixed deposit or from a post office savings account – are all shown under this head. Interest from both fixed deposit and recurring deposits is taxable while interest from savings bank account and post office deposits are tax-deductible to a certain extent. But they are shown under income from other sources.
Exempt income, those that are exempt from tax, is also included under this head.
Savings bank account interest income
Interest that gets accumulated in your savings bank account must be declared in your tax return under income from other sources.
Deduction on interest income under Section 80TTA
Section 80TTA allows for a tax deduction on interest income from bank savings account of up to Rs.10,000. Interest income from post office deposits is exempt up to Rs.3,500 for individual accounts. Interest income exceeding Rs.3,500 can then claimed as a deduction under Section 80TTA subject to a maximum limit of Rs.10,000.
How tax is calculated on fixed deposits?
Fixed deposit interest that you receive is added along with other income that you have such as salary or professional income, and you’ll have to pay tax on that income at a tax rate that’s applicable to you.
TDS is deducted on interest income when it is earned, though it may not have been paid. For example, the bank will deduct TDS on interest accrued each year on a FD for 5 years. Therefore, it is advisable to pay your taxes on an annual basis instead of doing it only when the FD matures.
Avoiding TDS on fixed deposits
Banks are required to deduct tax on interest income when deposits held in all the bank branches is more than Rs.10,000 in a year. A 10% TDS is deducted if PAN details are available. It is 20% if the bank does not have your PAN details.
The details of TDS deducted on Fixed Deposit Interest is in the Form 26AS.
If your total income is below the taxable limit, you can avoid tax deduction on fixed deposits by submitting Form 15G and Form 15H to the bank requesting them not to deduct any TDS. Form 15H is for senior citizens, those who are 60 years or older; while Form 15G is for everybody else.
These forms are for residents only and for those whose taxes add up to zero. These forms must be submitted at the start of the financial year. If you missed submitting them, then you can claim a refund by filing an income tax return.
These forms are valid for one year only. Therefore, they must be submitted each year to keep banks from deducting tax.
Reporting fixed deposit and recurring deposits in your tax return
If you have three FDs open, then add up all the interest income and enter it under “Other interest income”.
Reporting recurring deposit
Starting June 2015, when interest income from all the branches of the bank exceeds Rs.10,000 in a financial year, a 10% tax on interest earned will be deducted. The interest earned should be shown in ‘income from other sources.’
The PPF and EPF amount you withdraw after maturity is exempt from tax and must be declared as exempt income from income from other sources.
Note that: The EPF is only tax exempt after five years of continuous service.
If you are collecting pension on someone who is deceased, then you must show this income under income from other sources. There is a deduction of Rs 15000 or ⅓ of the family pension received whichever is lower from the Family Pension Income. This will be added to the taxpayer’s income and tax must be paid at the tax rate that is applicable.
Taxation of winnings from Lottery, Game Shows, Puzzles
If you receive money from winning the lottery, Online/TV game shows etc., it will be taxable under the head Income from other Sources. The income will be taxable at the flat rate of 30% which after adding cess will amount to 30.9%
Frequently asked Questions
Can I deduct expenses from ‘income from other sources’?
Yes, you can deduct expenses directly related to getting that income.
What are tax-saving FDs?
The tax-saving FDs come with a lock-in of 5 years. The amount you invest can also be claimed as deduction under Section 80C subject to a maximum limit of Rs.1,50,000. But like a regular FD, the interest is fully taxable.
I earn income solely from fixed deposits. Do I have to file an income tax return?
Any individual whose income exceeds Rs.2,50,000 during a financial year must file an income tax return in India. If the bank has deducted TDS and your income does not exceed Rs.2,50,000, then you must file a tax return to claim a refund on excess TDS deducted.