How much tax do you pay on interest

You may be aware that the interest income you earn on investment instruments such as fixed deposits, recurring deposits, bonds, etc. are subject to tax. You also need to disclose the details of interest income in your income tax return. 

You can reduce your taxability by availing of the many tax benefits that are available under the Income Tax Act, 1961(IT Act). But before you do this, you need to know how interest income is taxed. Let’s take a look at the taxability of interest incomes.

Interest income on domestic fixed / recurring deposits

The interest income earned on a fixed deposit is taxable, and you have to pay taxes as per the applicable tax rates under the IT Act for the said financial year. Moreover, banks deducts tax at source (TDS) on interest paid on fixed deposits when interest income exceeds Rs 40,000 (Rs 50,000 for senior citizens) in any given financial year for residents. 

The current rate of TDS for residents on interest income over the above limits is 10%. However, TDS shall be deducted at higher rate of 20% if a person does not have a PAN or in case of specified persons..  ‘Specified person’ refers to someone who has not filed their Income Tax Returns for both of the previous two years; and has aggregate TDS/TCS credit of Rs 50,000 or more in each of the two years. NRIs are subject to TDS at the rate of 30% plus applicable surcharge and cess.

One can also avail of an exemption on TDS by filing Form 15G (15H for senior citizens) if their overall taxable income from all sources is below the maximum amount not chargeable to tax. . Senior citizen can claim a deduction on interest income upto Rs. 50,000/- as per Section 80TTB.

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Interest income on savings account

If you earn interest income of up to Rs 10,000 from a savings account, you can claim tax deduction under Section 80TTA of the IT Act. However, if this amount exceeds Rs 10,000, it is taxable as per applicable slab rates. To calculate the exemption limit, add up all saving interest income from all accounts, including bank savings accounts, post office savings accounts, and cooperative bank savings accounts. . Senior citizen can claim deduction of interest income upto Rs. 50,000/- as per Section 80TTB for interest on Fixed deposit and interest on saving accounts.

Interest income on corporate bonds

Corporate bonds issued by public or private companies are taxable as per slab rates on an accrual basis. The interest income on bonds is included in ‘Income from other sources’, whereas the profit/loss from the sale of bonds is taxable under capital gains. However, interest income on tax-free bonds is exempt under Section 10(15)(iv)(h) of the IT Act. These are mostly government bonds or bonds from public undertakings such as Indian Renewable Energy Development Agency Ltd.

Interest income on PPF

If you earn interest income from a Public Provident Fund (PPF), you are not required to pay any taxes as it is fully exempt. PPF falls under the Exempt-Exempt-Exempt (EEE) scheme. Accordingly, the deposit, the interest earned, and the withdrawal amount are all exempt from tax.

The interest income you earn on investment instruments is subject to taxes as per various sections of the IT Act, 1961. However, if you want to avail of an exemption, you can invest in HDFC Bank investment products or look for schemes like Sukanya Samriddhi Yojana to enjoy tax-free returns.

Click here to know more about the lesser-known income tax deductions.

The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take or refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.

Lower tax on your investments can help you reach your financial goals sooner. But don't choose an investment based on tax benefits alone.

How investment income is taxed

You need to include investment income in your tax return. This includes what you earn in:

  • interest
  • dividends
  • rent
  • managed funds distributions
  • capital gains from property, shares and cryptocurrencies

You pay tax on investment income at your marginal tax rate.

You're allowed tax deductions for the cost of buying, managing and selling an investment. But there are rules around what you can and can't claim as a tax deduction. See the Australian Taxation Office (ATO)'s investment income deductions.

Investing and tax can be complex. See choosing an accountant for where to go for help.

Making capital gains or losses

Capital gains

If you sell an investment for more than the cost to acquire it, you make a capital gain. You need to include all capital gains in your tax return in the year you sell the investment. Capital gains are taxed at your marginal rate.

If you've held the investment for more than 12 months, you're only taxed on half of the capital gain. This is known as the capital gains tax (CGT) discount.

The ATO has information to help you work out your capital gains tax on different investments.

Capital losses

If you sell an investment for less than the cost to acquire it, you make a capital loss.

You can use a capital loss to:

  • reduce capital gains made in the year the loss occurs, or
  • carry forward the loss to offset future capital gains

How much tax do you pay on interest

Savannah makes use of a capital loss

Savannah bought $2,000 worth of shares (50 shares at $40 per share) in a large mining company.

After 18 months she sold the shares. They had fallen in price to $20 per share. She made a capital loss of $1,000.

Savannah also made a profit of $1,500 from selling others shares she held. She had held these shares for five years.

Savannah can deduct the $1,000 she made a loss on from the $1,500 capital gain. This leaves her with a profit of $500. As Savannah held the shares for more than 12 months, she only includes half the capital gain in her tax return. She'll pay tax on this $250 at her marginal tax rate.

Positive versus negative gearing

Positive gearing

Positive gearing is where you borrow money to invest and the income from the investment (for example, rent or dividends) is more than the cost of the investment (interest and other expenses).

If you're positively geared, you'll have extra money coming in. But you'll also have to pay tax on this income at tax time.

Negative gearing

Negative gearing is where you borrow to invest and the investment income is less than the cost of the investment.

Investors negatively gear as they can generally claim a tax deduction for the investment loss. The aim is for the capital growth to offset the loss in earlier years.

If you're making an investment loss, it is still costing you money. You'll need to have cash from other sources, like your salary, to cover interest and expenses.

Tax-effective investments

A tax-effective investment is one where the tax on your investment income is less than your marginal tax rate.

Choose investments based on your financial goals, risks you're comfortable with and expected returns. Tax benefits should be a secondary consideration.

Superannuation

Super is a tax-effective investment and one of the best ways to save for retirement. This is because the government provides tax incentives to save through super. These include:

  • A tax rate of 15% on employer super contributions and salary sacrifice contributions, if they're below the $27,500 cap.
  • A maximum tax rate of 15% on investment earnings in super and 10% for capital gains.
  • No tax on withdrawals from super for most people over age 60.
  • Tax-free investment earnings when you start a super pension.

See Tax and super for more information.

Insurance bonds

Insurance bonds are investments offered by insurance companies. They can be tax effective if you're planning to invest for 10 years and follow certain rules.

All earnings in an investment bond are taxed at the corporate tax rate of 30%. If no withdrawals are made in the first 10 years, no further tax is payable. They can be tax effective for investors with a marginal tax rate higher than 30%.

Beware tax-driven investments

Tax-driven schemes offer tax deductions now for investing in assets that may provide income in the future. These schemes can be high risk and some are scams. Check the ATO page investigate before you invest for how to spot a dodgy tax scheme. Or get professional advice from an accountant.

Investing and your tax return

Keeping good records will help you at tax time to:

  • Report investment income.
  • Claim all tax deductions you're entitled to.

It will also help you calculate any capital gains or losses when you sell an investment.

For all investments such as shares, property and cryptocurrencies you need to keep records to show:

  • How much you paid for it — contracts for purchase of the asset and receipts.
  • How much you sold it for — contracts for the sale of an asset and receipts.
  • Income you get from the investment — keep all records of income payments such as distribution statements, rental payment receipts and dividend statements.
  • Expenses paid while owning the investment — receipts for payments made to manage, maintain or improve the investment.

You'll need to keep records for five years after you included the income and capital gain or loss in your tax return.

How much interest income is taxable?

In most cases, your tax rate on earned interest income is the same rate as the rest of your income. So if your normal tax bracket is 25 percent, you'll also pay 25 percent of interest in taxes.

How are you taxed on interest?

Interest taxed as ordinary income Typically, most interest is taxed at the same federal tax rate as your earned income, including: Interest on deposit accounts, such as checking and savings accounts.

How do you calculate taxable interest income?

Where Do You Find Taxable Interest on Your W2? Taxable interest appears on Form 1099-INT. Box 1 of the form has all the interest income earned from the issuer. If there is something in Box 3, this figure only applies to interest inputted on your federal tax return.

How much is taxable income in Malaysia?

2020 income tax rates for residents.