How Your Interest Earned on Various Investments is Taxed?

Tue, 14 Feb 2023 17:01:30 +0000

The Buyt Desk

According to the Income Tax regulation, the interest you earn from different investment instruments is taxable. It is considered your gross income and taxed according to your tax bracket. It applies to all instruments like fixed deposits, bonds, stocks, recurring deposits, etc. But Income Tax Act has some provisions using which you can save taxes on interest earned from different sources.

To know about these options, understand how earned interest is taxed and how to save tax on these earnings.

Taxability of Interest Earned from Savings Account

The Income Tax Department has bifurcated how interest will be charged on the savings account and fixed deposit. The interest income coming from the saving account, co-operative society saving account, or post-office saving account is taxable under section 80TTA of the Income Tax Act, 1961. The maximum deduction amount is Rs. 10,000 per year. It is not applicable to interest earned from all savings accounts. It confines only to the above-mentioned banks.

On the other hand, if the total interest earned from all saving accounts is more than Rs 10,000, which generally does not happen as most people invest their extra amount in investment instruments that ensure better returns. The deduction can be availed only for Rs 10,000.

The same deduction is different for senior citizens. For senior citizens, if a senior citizen has earned less than Rs. 50,000 through an interest in totality, then it will not be taxed and claimed as a deduction. If the income is more than Rs. 50,000, then tax relief will be given only up to Rs. 50,000, and over and above this will be taxed.

Taxability on Interest Income Coming from Fixed Deposit

The interest earned on a fixed deposit is fully taxable as it is considered income from other sources by the bank. Therefore, the interest sum gets added to the gross income. The banks deduct the TDS (Tax deducted at Source) if the interest earned is more than Rs. 40,000. And for senior citizens, the cap is Rs 50,000. If the interest earned is more than the cap amount, it comes in the taxable category. Banks deduct the TDS at the rate of 10%, and if the depositor does not have a Permanent Account Number (PAN), it is 20% TDS.

Paying TDS is not enough for those having higher incomes and falling in any tax bracket. For these individuals, the income earned through interest is added to the gross income of that person and taxed accordingly.

If any person’s total income is below the tax slabs, he can request tax exemption from the banks by filing form 15G. It is 15H for senior citizens.

Senior citizens can claim a deduction on interest income earned above Rs 50,000, according to section 80TTB.

Taxability on Interest Income Coming from Bonds

Any income gained from a bond gets taxed on an accrual basis, considering it as income from other sources. And the profit and loss coming from the bond are considered capital gains. One can take benefit of the Income Tax Act section 10(15)(iv)(h) to get an exemption in this tax.

Income From Public Provident Fund

The interest earned from PPF is tax-free. PPF falls under the category Exempted-Exempted-Exempted (EEE) category.

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3 Best Investments for Accumulation of Retirement Corpus Decoded!

Fri, 16 Apr 2021 05:51:16 +0000

The Buyt Desk

When you started your profession, you would have thought of buying a house. When you planned a family, you would have thought of your child’s future. When you think of aging, you buy medical insurance. But what about retirement planning? Your job or business is giving you a constant flow of money that will stop after retirement. Thus, you should definitely make a plan to substitute this income afterward to fulfill your financial needs. The sooner you begin saving for retirement, the higher corpus you can generate. A common principle of investment is the diversification of money in different assets. Take care of this while planning for your retirement.

The main criteria to determine investments for retirement are:

How much retirement corpus you will require?
To what extent can you take a risk?
What is your time horizon?
What is the tax liability for the investment?
How much return will the investment generate?
Whether the returns from an investment account for inflation or not?
Whether the investment will provide regular income after retirement or not?

Usually, individuals invest in traditional financial instruments such as FD and small saving schemes for retirement but explore other investments for higher and inflation-adjusted returns. Below are 3 most suitable investments that will help you lead a comfortable and content retired life.

Equity Mutual Funds: A risk-averse individual immediately turns his back towards market-linked equity funds. However, it is just a matter of understanding how equity mutual funds work before they become your favorite type of investment. Moreover, consult an expert financial consultant to decide how to and where to invest in equity funds. Let us closely compare these funds against the above-mentioned criteria for retirement planning.

Over a large time horizon, equity mutual funds can give you great returns. On average, the yearly rate for these funds comes out to be 12-16%.
Without a doubt, these funds are risky as their performance varies with the market. However, as mentioned above, the earlier you start to invest, the greater time you can stay invested. When you stay invested in these funds for a long time like 15-20 years then the risk is averaged out. In short, in a long investment horizon, the risk related to equity mutual funds is low. Also, when you are investing in equity funds, you do not directly trade in equity but hand over the management of your money to a fund expert. A highly knowledgeable expert manages your money, and thus, the associated risk is lowered. There is another way to mitigate risk associated with equity funds. You should invest using a Systematic Investment Plan (SIP) instead of investing money as a lump sum amount.
The returns from equity funds are tax-efficient. They are not taxed according to your income tax slab instead, LTCG tax applies to them. First, the returns from equity funds enjoy tax deduction under section 80C of the IT Act. Further, a return up to Rs.1 lakh is exempt from taxation. After that, the LTCG tax of 10% applies. Thus, in comparison to other financial instruments, you pay less tax when you invest in equity funds.
In the long term, the return rate of an equity fund exceeds the yearly inflation rate. As a result, these funds are good to beat the heat of inflation.
There are three investment modes in equity mutual funds: growth, dividend, and dividend reinvestment. It is possible for you to switch between these modes as per your requirement. In the initial years of your profession, growth mode will be good to generate wealth. After retirement, you can opt for the dividend option. It can be a substitute for your income. However, the problem is that the frequency at which the dividend is paid is not fixed. In this case, you can easily withdraw money from your fund account and invest in fixed-income financial instruments.

National Pension Scheme (NPS): Even now, you are not ready to take the risk associated with equity funds then let us look at a moderate risk financial instrument – NPS.

NPS can provide you decent returns. On average, you can expect a return rate of 8 to 10%. You have to cultivate investment discipline to invest money regularly in the NPS account to enjoy a good retirement corpus after service/business.
Investment in NPS is not risk-free. It is also a market-linked financial product. Nonetheless, the risk is moderate because the money is invested not only in the equity market but also in the debt market. You have the option to choose the fund in which your money should be invested. You can simply choose the low-risk NPS category to mitigate market-linked fluctuations.
After attaining 60 years of age, the accumulated corpus will be paid as a pension to you. Thus, your regular stream of income will continue. In case you wish to withdraw the accumulated amount after retirement, you can withdraw a maximum of 60% of the corpus accumulated. The remaining 40% will be disbursed as pension.
The money withdrawn as a lump sum amount after retirement is tax-free. NPS is considered for the yearly tax deduction of Rs.1.5 lakhs under section 80C of the Income Tax Act. It provides an additional tax benefit of Rs.50, 000 under section 80CCD (1B) of the IT Act as well. Thus, investment in NPS is tax efficient.
As a certain percentage of money is invested in equity under every NPS category, thus, it offers some protection against inflation.

Public Provident Fund (PPF): PPF is a Government scheme that helps you generate a corpus for retirement.

It provides reasonable returns though definitely lower than equity funds. The current rate of interest is 7.1%. The Government revises the rate every quarter. The interest of the scheme is definitely higher than that of a savings account. You can deposit up to Rs.1.5 lakhs per annum.
It is a safe investment, which provides assured returns after the lock-in period of 15 years.
You can withdraw the whole sum after 15 years or extend the scheme in blocks of 5 years.
The best feature of PPF is that it falls in the EEE tax category. The capital, interest, and return of this scheme are non-taxable.
Though PPF has advantages like tax benefit and assured returns, it does not provide a safeguard against inflation. If the rate of inflation is higher than the rate if interest offered in PPF, then there is no actual wealth accumulation.
Once the term is over, you can withdraw the corpus, however, the scheme does not provide you a constant income. After corpus accumulation, you can invest the money in fixed income instruments.

If you have not started retirement planning, begin now. The sooner you start, the better it is. While deciding on asset allocation, it is paramount to analyze the tax liability and consider the inflation rate.

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