A lot of people in India, over the years, have become comfortable with investing in instruments that offer guaranteed returns. Aside from bank fixed deposits, small savings schemes have become extremely popular among conservative, risk-averse investors. While investing in good for wealth creation, it is extremely important to know how the interest earned on specific instruments that qualify for income tax deduction is taxed.
Also read: Samsung announces offers on smart TVs and appliances during Flipkart, Amazon Festive sale
Before choosing any investment instrument, one must remember that not all investments that qualify for tax deduction under Section 80C of the Income Tax Act enjoy exempt-exempt-exempt (EEE) status for income tax purposes. Knowing the taxation rules is important because it makes a big impact on your net income returns on your investments. For investors who fall under the highest tax bracket, knowing taxation rules is just as important as knowing the rate of return.
How your income from various investment instruments in taxed:
Interest on the savings bank account is taxed as ‘Income from another source’ as per the tax slab rate applicable to the taxpayer. However, under section 80TTA, interest earned up to ₹10,000 per year is allowed as deduction. This limit of ₹10,000 includes interest from all savings accounts with banks, co-operative banks, and post offices. If the interest earned from these sources exceeds ₹10,000, the additional amount will be taxable.
How is interest on bank FD taxed?
Interest income from a bank fixed deposit is fully taxable as ‘Income from other sources.’ The interest income is taxed at the applicable tax rates. Banks also deduct a 10% tax at source (TDS) at the time they credit the interest to your account. If you fall in a higher tax bracket, you will need to pay additional tax.
How is interest in Public Provident Fund (PPF) taxed?
PPF qualifies for income tax deduction under section 80C of the Income Tax Act up to ₹1.5 lakh in a financial year. Interest received is exempt from tax and there is no tax on the amount received on maturity of the account. It enjoys an EEE status.
How is interest on National Savings Certificate (NSC) taxed?
Amount invested in NSC is eligible for deduction under Section 80C of the IT Act. The interest on NSC accrues annually, which gets reinvested and hence no tax liability on yearly accrual. But, at the time of maturity, interest received is liable to tax under the head ‘Income from other sources’. This tax will be subject to the income tax slabs applicable to an individual.
How is interest on KVP taxed?
KVPs, best known to double your money in 10.4 years do not enjoy any taxation incentives. Interest on KVP is taxable on an accrual basis and will be taxed as Income from other sources.No tax is deducted at source. The investments do not qualify under Section 80C.
How is interest on Sukanya Samriddhi Yojana taxed?
Just like PPF, the Sukanya Samriddhi Yojana, a special investment scheme by the government for gild child, falls in the exempt-exempt-exempt (EEE) investment category, which means you do not have to pay any taxes on your investment, the interest earned, and on maturity. The investments under SSY qualify for tax deduction under Section 80C.
