Heads of Income
The Income Tax Department breaks down income into five heads of income for the purpose of income tax reporting:
- Income from Salary
- Income from House Property
- Income from Capital Gains/Loss
- Profits and Gains from Business and Profession
- Income from Other Sources
Income from Other Sources covers income that does not fall under any of the other heads of income.
Savings Bank Account – Interest Income
Interest that gets accumulated in your savings bank account must be declared in your tax return under income from other sources. Do note that bank does not deduct TDS on savings bank interest. Interest from both fixed deposit and recurring deposits is taxable while interest from savings bank account and post office deposits are tax-deductible to a certain extent. But they are shown under income from other sources. Interest income from a savings bank account or a fixed deposit or from a post office savings account are all shown under this head.
Deduction on Interest Income Under Section 80TTA
For a residential individual (age of 60 years or less) or HUF, interest earned upto Rs 10,000 in a financial year is exempt from tax.The deduction is allowed on interest income earned from:
- savings account with a bank;
- savings account with a co-operative society carrying on the business of banking; or
- savings account with a post office
Senior citizens are not entitled to benefits under section 80TTA.
Tax on Fixed Deposits
Fixed deposit interest that you receive is added along with other income that you have such as salary or professional income, and you’ll have to pay tax on that income at a tax rate that’s applicable to you.TDS is deducted on interest income when it is earned, though it may not have been paid.
Example:The bank will deduct TDS on interest accrued each year on a FD for 5 years. Therefore, it is advisable to pay your taxes on an annual basis instead of doing it only when the FD matures. Senior citizens, with effect from 1 April 2018, will enjoy an income tax exemption upto Rs 50,000 on the interest income they receive from fixed deposits with banks, post offices etc. under Section 80TTB.
Avoiding TDS on Fixed Deposits
Banks are required to deduct tax when interest income from deposits held in all the bank branches put together is more than Rs.40,000 in a year (Prior to FY 2019-20, it was Rs.10,000). A 10% TDS is deducted if PAN details are available. It is 20% if the bank does not have your PAN details. The details of TDS deducted on Fixed Deposit Interest is in the Form 26AS.If your total income is below the taxable limit, you can avoid tax deduction on fixed deposits by submitting Form 15G and Form 15H to the bank requesting them not to deduct any TDS. Form 15H is for senior citizens (60 years or older); Form 15G is for everybody else. These forms are for residents only and for those whose taxes add up to zero. These forms must be submitted at the start of the financial year. If you missed submitting them, then you can claim a refund by filing an income tax return. These forms are valid for one year only. Therefore, they must be submitted each year to keep banks from deducting tax.
Reporting Fixed Deposit and Recurring Deposits in Your Tax Return
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 deposit
Starting June 2015, when interest income from all the branches of the bank including from recurring deposits, exceeds Rs.10,000 in a financial year, a 10% tax on interest earned will be deducted. The interest earned should be shown in ‘income from other sources.
Exempt Income
The PPF and EPF amount you withdraw after maturity is exempt from tax and must be declared as exempt income from income from other sources. Note that: The EPF is only tax exempt after five years of continuous service. Read in detail the rules of EPF withdrawal and taxability thereof.
Family Pension
If you are collecting pension on behalf of someone who is deceased, then you must show this income under income from other sources. There is a deduction of Rs 15,000 or one-third of the family pension received whichever is lower from the Family Pension Income. This will be added to the taxpayer’s income and tax must be paid at the tax rate that is applicable.
Taxation of Winnings from Lottery, Game Shows, Puzzles
If you receive money from winning the lottery, Online/TV game shows etc., it will be taxable under the head Income from other Sources. The income will be taxable at the flat rate of 30% which after adding cess will amount to 31.2%
Expenses allowed to be deducted from certain income sources
Similar to freelancers and business who can deduct certain expenses from their income, a taxpayer earning income from other sources can claim deductions for expenses as given below:
- Commission or remuneration for realising dividends (if not covered under Section 115-O which is exempt) or interest on securities. If any money or commission has been paid for realising a dividend, such expenses are allowed to be deducted from the dividend income which is taxed as income from other sources.
- Expenses (not capital expenses) such as repairs, insurance premium, and depreciation in respect of plant, machinery, furniture and buildings are deductible from rental income earned by letting out of plant, machinery, furniture and building.
- The rental income from the plant and machinery is chargeable to tax under income from other sources. The expenses incurred in respect of such plant and machinery are allowed to be deducted.
- A standard deduction is allowed on family pension, i.e. a deduction which is the lower of Rs.15,000 and one-third of such income is available in case of income in the nature of family pension which is paid monthly to the family members of a deceased employee.
- In case, interest on compensation or enhanced compensation is received, 50% of the interest is allowed to be deducted (applicable starting from the assessment year 2010-11).
- As per Section 57(iii), a deduction is allowed for any other expense (which is not a capital expense) which has been spent wholly and exclusively for making or earning such income.
Frequently Asked Questions
I have received dividend from an Indian company this year. Is this taxable as income from other sources?
Yes, dividend income is taxable as “Income from other sources”. The government has abolished Dividend Distribution Tax (DDT) from FY 2020-21. Hence, the investor has to pay tax on dividend income. The taxpayer can claim interest expense up to 20% of the dividend income. Tax shall be paid at the normal tax slab rates applicable to you. Also, if the total amount of dividend exceeds Rs 5,000, the company deducts TDS at 10% while paying the dividend.
What is the tax treatment of dividend received from a foreign company.
Dividend received from a foreign company are taxable as “Income from other sources” and you need to pay taxes at rates based on the income slab you fall under.
Is dividend received from mutual funds taxable?
Dividend received from mutual funds is taxable as “income from other sources” and one can claim interest expense up to 20% of the dividend income. The tax shall be paid as per the normal income tax slab rates applicable to you.
I have received prize money worth Rs 2 lakhs by participating in a game show. Is this taxable?
Yes. Prize money received from participating in game shows in taxable as income from other sources. Generally, taxes at source would be deducted on such sum at the time of payment to you itself at the rate of 30%. Even if taxes have not been deducted, you may pay taxes on such income based on rates applicable to the income slab you fall under.
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?
All such interest income is taxable under “Other sources”. You will be liable to tax based on your income slab. Further, you enjoy a deduction upto Rs 10,000 on interest received from savings account and recurring deposits. While senior citizens get a deduction upto Rs 50,000 on their interest income from fixed deposits.
On the occasion of my marriage, I received Rs 1 lakh in cash from my father. Will this sum be taxed?
Money received from a “relative” is not taxable under the Indian tax laws. Further “relative” includes father. Therefore, you will not be taxed on this sum you have received.
Can I deduct expenses from ‘income from other sources’?
Yes, you can deduct expenses directly related to getting that income.
What are tax-saving FDs?
The tax-saving FDs come with a lock-in of 5 years. The amount you invest can also be claimed as deduction under Section 80C subject to a maximum limit of Rs.1,50,000. But like a regular FD, the interest is fully taxable.
I earn income solely from fixed deposits. Do I have to file an income tax return?
Any individual whose income exceeds Rs.2,50,000 during a financial year must file an income tax return in India. If the bank has deducted TDS and your income does not exceed Rs.2,50,000, then you must file a tax return to claim a refund on excess TDS deducted.
As a tax expert with comprehensive knowledge in income tax matters, I can provide a detailed breakdown of the concepts discussed in the article. My expertise stems from a deep understanding of the tax laws and regulations, and I have hands-on experience navigating the complexities of income tax reporting.
Heads of Income: The Income Tax Department categorizes income into five heads for tax reporting purposes:
-
Income from Salary: Income earned through employment.
-
Income from House Property: Rental income from owned properties.
-
Income from Capital Gains/Loss: Profit or loss from the sale of assets.
-
Profits and Gains from Business and Profession: Income from business or professional activities.
-
Income from Other Sources: Residual category covering income not falling under the other heads.
Income from Other Sources: This category includes various types of income, such as interest from savings bank accounts, fixed deposits, recurring deposits, post office deposits, family pension, winnings from lotteries or game shows, and any other income not covered by the other heads.
Interest Income from Savings Bank Account: Interest earned on savings accounts is declared under income from other sources. TDS is not deducted on savings bank interest. However, interest from fixed deposits and recurring deposits is taxable, with certain exemptions for senior citizens under Section 80TTA.
Tax on Fixed Deposits: Interest from fixed deposits is added to other income, and tax is levied at the applicable rate. TDS is deducted on interest income, and senior citizens can avail an exemption under Section 80TTB.
Avoiding TDS on Fixed Deposits: To avoid TDS on fixed deposits, individuals can submit Form 15G or Form 15H, depending on age and eligibility. These forms must be submitted at the start of the financial year.
Reporting Fixed Deposit and Recurring Deposits: Interest income from fixed deposits and recurring deposits is reported under 'Other Interest Income' and 'Income from Other Sources,' respectively, in the tax return.
Exempt Income: Certain income, such as withdrawals from PPF and EPF after maturity, is exempt from tax and must be declared as exempt income from other sources.
Expenses Allowed to be Deducted: Similar to other sources of income, certain expenses can be deducted from income from other sources, including commission for realizing dividends, repair expenses, insurance premiums, and depreciation on assets.
Frequently Asked Questions: The article addresses common queries related to the tax treatment of dividend income, winnings from gameshows, interest income, and expenses deductions.
As an expert, I am well-versed in the nuances of income tax, ensuring accuracy and compliance with regulations in tax reporting.
