Most risk-averse people prefer to invest their money in Fixed Deposits, Recurring Deposits or Public Provident Funds (PPF). These popular investments earn interest. Also, to a large extent, they have nothing to do with market conditions.
Any interest will be taxed
If you take interest from any item, then it is an additional source of your earning. Like any other source, it is also taxed as per Income Tax rules. That is, if it is more than the limit set by the government, then the income earned on your investment will be taxed.
Can take advantage of tax saving
However, you can reduce your tax liability by taking advantage of tax savings under the Income Tax Act 1961. But first you need to understand how interest income is taxed. Things to know about tax on interest earned income.
Earning interest from FD
Interest earned from fixed deposits is taxable. You have to pay it according to the tax slab. Also, banks deduct TDS (Tax Deduction at Source) when the interest income on fixed deposits reaches Rs 40,000 (Rs 50,000 for senior citizens) in a financial year. Banks levy 10% tax on income above Rs 40,000.
Taxes charged more than NRIs
TDS at the rate of 30% plus surcharge on NRIs is deducted as tax. If your total taxable income from all sources is less than the maximum amount that is not taxable, you can claim exemption from TDS by filing Form 15G.
relief to senior citizens
Section 80TTB allows senior citizens to deduct up to Rs 50,000 from interest earned. If your bank deducts TDS and your total income is less than Rs 500,000 in a year, you may be eligible for a refund.
interest on recurring deposit
There is no tax benefit on investment in recurring deposits. Income tax will be payable on the interest collected from recurring deposits. Tax should be paid at the rate of tax bracket of the recurring deposit holder. Recurring deposit is subject to TDS. It is deducted at the rate of 10% on interest above Rs.40,000. However, no TDS is deducted on interest up to Rs.40,000.
PPF interest income
You are not obliged to pay any tax on interest earned from Public Provident Fund (PPF). Because it is completely discounted. The exempt-exempt-exempt (EEE) regime applies to PPF. As a result, deposits, interest received and withdrawn are all tax free.