An overview of income heads
In order to report income tax, the Income Tax Department divides income into five categories:
- Salary income
- Investing in house property
- Capital Gains/Losses
- Profession and business income
- Other sources of income
Other sources of income refer to income that does not fall under any of the other categories.
Interest Income from Savings Bank Accounts
In your tax return, you must declare interest that accumulates in your savings bank account. Savings bank interest is not subject to TDS deduction by the bank. While interest from fixed deposits and recurring deposits is taxable, interest from savings bank accounts and post office deposits is tax-deductible. However, they are listed under income from other sources. This head includes interest income from savings bank accounts, fixed deposits, and post office savings accounts.
Section 80TTA Deduction for Interest Income
Residential individuals (age 60 or less) or HUFs are exempt from paying tax on interest earned up to Rs 10,000 in a financial year. Interest income earned from:
- Bank savings account;
- A savings account with a co-operative society engaged in banking;
- Postal savings account
Section 80TTA does not apply to senior citizens.
Tax on Fixed Deposits
The interest you receive from a fixed deposit is added to other income you receive, such as salary or professional income, and you will have to pay tax on that income at your individual tax rate. The TDS is deducted on interest income even if it hasn’t been paid yet.
Example: A bank will deduct TDS on interest accrued on a FD for five years. Therefore, you should pay your taxes annually rather than when the FD matures. Under Section 80TTB, senior citizens will be exempt from income tax on interest income they receive from fixed deposits with banks, post offices, etc. from 1 April 2018.
Avoiding TDS on Fixed Deposits
Interest income from deposits held in all bank branches combined is required to be taxed if it exceeds Rs.40,000 in a year (prior to FY 2019-20, it was Rs.10,000). In the event that PAN details are available, a 10% TDS is deducted. In the absence of your PAN details, 20% TDS is deducted. The details of TDS deducted on Fixed Deposit Interest can be found in Form 26AS. By submitting Forms 15G and 15H to your bank, you can request that they do not deduct any tax on fixed deposits if your total income is below the taxable limit. There is a form 15H for senior citizens (60 years or older) and a form 15G for everyone else. These forms are for residents only and for those who have no tax liability. The forms must be submitted at the beginning of the financial year. By filing an income tax return, you can claim a refund if you missed submitting them. These forms are only valid for one year. It is therefore necessary to submit them each year in order to prevent banks from deducting tax from your account.
Tax Reporting for Fixed Deposits and Recurring Deposits
Reporting Fixed Deposits
If you have three FDs open, then add up all the interest income and enter it under ‘Other interest income’.
Reporting Recurring Deposits
Interest income earned by all branches, including recurring deposits, that exceeds Rs.10,000 will be subject to a 10% tax beginning June 2015. Interest earned should be included in ‘other income’.
PPF and EPF amounts withdrawn after maturity are tax-exempt and must be reported as exempt income. However, the EPF becomes tax-exempt after five years. Please read the details regarding the taxability of EPF withdrawals carefully.
When collecting pensions for a deceased parent, you must report this income under other sources of income. The Family Pension Income is reduced by Rs 15,000 or one-third of the family pension received. In this case, tax will be due at the applicable rate on the amount added to the taxpayer’s income.
Taxation of Winnings from Lottery, Game Shows, Puzzles
Various lottery winnings, as well as winnings from online and television games, will be taxable as income from other sources. After adding the cess, the income will be taxed at 31.2%.
Expenses allowed to be deducted from certain income sources
The following expenses can be deducted from taxpayers earning income from other sources, similar to freelancers and business owners:
- Commissions or remuneration for realizing dividends (unless they are exempt under Section 115-O) or interest on securities. It is possible to deduct commissions or money paid to realize dividends from dividend income that is taxed as other income.
- Rents earned from renting out property (plant, machinery, furniture, and buildings) are deductible (not capital expenses) like repairs, insurance premiums, and depreciation.
- Other sources of income cover the rental income from the plant and machinery. Plant and machinery expenses can be deducted.
- In the case of family pensions paid to members of the deceased employee’s family, there is a standard deduction of Rs.15, 000 and a third of such income can be deducted.
- The deduction of 50% of interest on compensation or enhanced compensation will be allowed starting with the 2010-11 assessment year.
- Expenses that are primarily used to generate income may be deducted under Section 57(iii).
Frequently Asked Questions
This year, I received a dividend from an Indian company. Is this income from other sources taxable?
The tax treatment of dividend income is the same as that of “Income from other sources”. In FY 2020-21, the government will abolish dividend distribution tax (DDT). As a result, dividend income is taxed by the investor. Dividend income can be deducted up to 20% in interest expenses. You will be taxed at your normal tax slab rate. Moreover, if the dividend total exceeds Rs 5,000, TDS is deducted at 10%.
What is the tax treatment of dividend received from a foreign company.
Foreign dividends are taxable as “Income from other sources” and you must pay taxes based on your income slab.
Is dividend received from mutual funds taxable?
The dividend income received from mutual funds is taxable as “income from other sources” and can be claimed as interest expense up to 20% of the dividend income. You will be taxed according to your normal income tax slab rate.
I have received prize money worth Rs 2 lakhs by participating in a game show. Is this taxable?
Yes, of course. Prize money from game shows is taxable as other income. Taxes at source will generally be deducted from such sums at the time of payment to you itself at a rate of 30%. Taxes may still be deducted on such income, regardless of whether taxes were deducted.
I have interest income from a fixed deposit, a recurring deposit and a savings account. What is the taxability? Do I have deductions available on such income?
Interest income of this type is taxable under “Other sources”. Depending on your income slab, you will be subject to tax. Furthermore, interest received from savings accounts and recurring deposits can be deducted up to Rs 10,000. The interest income from fixed deposits can be deducted up to Rs 50,000 for senior citizens.
On the occasion of my marriage, I received Rs 1 lakh in cash from my father. Will this sum be taxed?
According to Indian tax laws, money received from a “relative” is not taxable. Furthermore, “relative” includes father. Therefore, you won’t have to pay taxes on this amount.
Can I deduct expenses from ‘income from other sources’?
You can deduct expenses directly related to obtaining that income.
What are tax-saving FDs?
Tax-saving FDs are locked in for five years. Under Section 80C, you can also deduct up to Rs.1,50,000 from your investment. The interest on a regular FD, however, is fully taxable.
I earn income solely from fixed deposits. Do I have to file an income tax return?
Individuals who earn more than Rs.2,50,000 in a financial year are required to file an income tax return in India. To claim a refund of excess TDS deducted, you must file a tax return if the bank has deducted TDS on your income and it does not exceed Rs.2,500,000.