Tax on Interest Income | Vakilsearch

Tax on Interest Income | Vakilsearch

The Income Tax Act, 1961 charges income under this head under Section 56. Incomes not assessed under any other head of the income tax in India are assessed under this residuary head. 

Here are a few assessable incomes under this heading.

Dividend Income

In the event of a company’s accumulated profits being distributed to shareholders, this is referred to as a dividend. Dividend income from shares, whether from an Indian company or a foreign company operating in India, is taxable in India. Profits could be part of such a distribution.

TDS is usually applied to dividend income at 10%. Dividend income under $5,000 does not require TDS to be deducted. Dividend interest expenses are allowed as a deduction, subject to a limit of 20%. Surcharges on dividend income may not exceed 15%, however.

Casual Income

An example of casual income is winnings from card games, the lottery, racing horses, or other games like betting or gambling. Income from other sources is taxed at 30% without any expense allowance under the head of other sources. Unless the interest amount exceeds $10000, TDS @ 30% shall be deducted from the lottery payer.

Interest Received on Enhanced Compensation

A government of India acquisition of land, buildings, or other assets for a development project normally involves compensation for the aggrieved party. These types of acquisitions sometimes form a matter of court disputes which, if compensation is enhanced, the aggrieved receive enhanced compensation along with interest; Enhanced compensation may be taxed under either head capital gains or business income, depending on the nature of the property. Other sources of assessment apply to enhanced compensation, however.

Interest Income

Interest income from debt securities, fixed deposits, or sums of deposits that generate interest is taxable under this heading. Interest income could be further categorised into the following types 

Interest Income on Saving Bank Account Deposits

In addition to interest from saving bank accounts, interest from other sources is taxable. A savings bank account at the post office or other scheduled banks could earn such an interest. Tax Deduction at Source (TDS) may apply. The Chapter 6A Deduction, specifically Section 80TTA, entitles persons under the age of 60 to a deduction of up to INR 10000 from their interest income.  

Interest Income on Recurring or Fixed Deposits

Fixed deposits or recurring deposits are subject to assessment under the other sources of income. You must have your deposits with any scheduled banks, corporative societies, or other financial institutions like NBFCs. Deposit interest income could be deductible by 10% from your taxable income.

If you want to claim a deduction under Section 80TTB, you must be a senior citizen residing in India and of 60 years or more who does not claim a deduction under Section 80TTA. Senior citizens are eligible for a deduction of $5000 for interest earned on saving bank account deposits and recurring or fixed deposits. 

The deduction under Section 80TTB is only available to individuals resident in India and who are over the age of 60. If a person is ineligible under Section 80TTA, he or she may be eligible to deduct interest on savings bank account deposits only under Section 80TTA.   

Saving Bank Account Post Office Deposits

Individual savings and joint bank accounts are exempt from interest on savings deposits up to $3500. This limit has been increased to 7000. The exemption is not a deduction, so these individuals are also eligible to claim the deductions under Section 80TTA and 80TTB.

Other Interest Income

Interest on Public Provident Fund (PPF) or other statutory constituted funds for employees are exempt from tax under this head. 

Income from Owning and Maintaining Race Horses

A person who has income from owning and maintaining race horses is subject to income tax at the slab rate if the income is taxable under other sources.

However, if the assessee owns and maintains any other animal, his income will be assessed as business income.

Family Pension Payments

Pension income received on behalf of a deceased person will be treated as income of the heir and subject to tax assessment. Legal heirs may deduct one-third of their pension, up to $15,000.

Other Income

Other sources of income include:

  1. Fees for directors’ meetings
  2. Legislative remuneration
  3. Rental income from vacant land
  4. Agriculture income comes from outside India
  5. Interest on delayed income tax refunds
  6. Property acquisition advance money forfeited
  7. Gifts
  8. Rental income from machinery that is not subject to business tax 
  9. A person’s income is not assessed under any other heading, including capital gains, salary, and business income.

Conclusion

Besides other sources of income, other sources of income also contribute to income assessment. In addition, the income cannot be exempted under any other provision of the Income Tax Act. As a result, income not assessable under other heads is assessed under “Other Sources.” Some interest incomes are deductible and are exempt from interest on post office saving bank deposits.

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