Accounting of savings account, fixed deposits interest
The Financial Express
Tax Director, People Advisory Services, EY India
Though it has been proven time and time again that the rate of interest on fixed deposits or savings accounts cannot beat inflation, the fact remains that a majority of the salaried population falls back on this option. No doubt the investments in securities and mutual funds can produce higher returns, but FDs and savings accounts offer security of capital and ease in parking excess funds, while waiting for the right time to invest in alternatives. FDs are especially popular amongst retired population as senior citizens above the age of 60 years can earn a slightly higher rate of interest. Interest earned on FDs and savings accounts is taxable as “income from other sources” and is required to be reported in the annual tax return.
Interest on savings accounts: The tax deduction at source (TDS) provisions do not apply in case of interest on savings accounts irrespective of the amount of interest earned. Further, the Income tax Act, 1961 (Act) provides for a deduction under section 80TTA up to Rs 10,000 from interest earned from savings account (including cooperative banks and post office). This is a cumulative deduction available from the total interest income earned from all the savings accounts by an individual. This deduction is applicable only in respect of interest from savings accounts and not to interest on FDs.
Interest on FDs: Interest on FDs earned in excess of Rs 10,000 is subject to TDS at the rate of 10%. If the recipient does not furnish the “Permanent Account Number” (PAN), TDS at a higher rate of 20% applies. However, in case of a resident if the tax payable on the total income including the interest is “Nil”, TDS provisions do not apply on such interest income. The recipient of interest, can make a declaration in Form 15G to the bank in order to avail waiver form the TDS provisions on such interest income (Form 15H applies in case of senior citizen above 60 years of age). A separate declaration needs to be made for every year and should be made at the beginning of the year.
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Interest on accounts for Non Resident Indians: Interest from Non-Resident (External) account is fully exempt from tax in India (subject to fulfilment of conditions) whereas interest on Non-Resident (Ordinary) account is taxable and subject to TDS at the rate of 30%.
Clubbing provisions: Sometimes parents make deposits in the name of their minor child. Interest on such deposits is required to be clubbed in the hands of the parent having greater income. In that case, the parent can claim an exemption upto Rs 1,500 under section 10(32) of the Act.
Tax rate: Interest income is taxable at the normal rate of tax. India follows a progressive slab rate structure as per which, tax on income of Rs 10,00,000 works out to Rs 125,000 and income above Rs 10,00,000 is taxable in the 30% bracket. In addition to that a 12% surcharge is applicable if the total income exceeds Rs 1,00,00,000 and also a secondary and higher education cess of 3% (on tax and surcharge) is applicable in all the cases. An important point here is that the tax is required to be calculated on the gross interest income i.e. net interest income received as increased by the TDS deducted. The TDS amount can be claimed as a credit against the total tax on total income.
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Tracking of interest and TDS: To track the exact amount of interest income and TDS thereon, Form 26AS can be referred which is an annual tax statement that displays the entire information on income paid, TDS deducted thereon, taxes paid by way of advance tax, self-assessment tax and also income-tax refund and interest received thereon. Form 26AS does not reflect savings account interest since TDS does not apply to it. Form 26AS is an important information tool relied on by taxpayers as well as tax authorities to track income and tax details. It is highly recommended to refer to and preserve Form 26AS before preparing tax return and address any discrepancies to avoid any future scrutiny by the Tax Authorities. Further a certificate in Form 16A is issued by the deductor of tax mentioning details such as interest paid and TDS thereon which should be kept on record.
Filing the tax return and disclosures: It is important to select the right ITR form for filing the tax return. The gross interest on savings accounts and FDs needs to be reported in “Schedule OS” of the respective ITR form and the deduction under section 80TTA needs to be reported in “Schedule VIA” which covers deduction under chapter VI-A of the Act. Separately, one should not forget to report TDS deducted on interest in “Schedule TDS” alongwith the details of PAN and Tax Deduction Number (TAN) of the deductor. Further “Schedule PARTB – TI – TTI” also requires details of all the savings and current bank accounts held during the year to be reported (other than dormant accounts). In addition to that, the individuals having a total income exceeding Rs 50,00,000 in the tax year are required to report deposits with banks in “Schedule AL”. Lastly, interest exempt from NRE account should be reported in the “Schedule EI”.
Non-disclosure of interest income can be easily tracked by the Tax department by accessing Form 26AS and one should report taxable income appropriately and pay tax thereon. The tax return for Tax Year 2015-16 is due on 31 July 2016 which is a Sunday so if you have not filed your tax return, do it today!