Interest Income

Deduction limits and TDS thresholds are periodically revised. Dividend income is dealt with separately in Dividend Taxation. This article is for general information and does not constitute tax advice.

What counts as interest income

Savings account interest, fixed and recurring deposit interest, bond and debenture interest, post office scheme interest, and interest on an income tax refund are all taxable under Income from Other Sources, at slab rate, unless the interest arises as part of an actual lending business, in which case it falls under Business and Professional Income instead.

The 80TTA and 80TTB deduction

Individuals and HUFs under 60 can claim a deduction of up to ₹10,000 on savings account interest specifically, under old Section 80TTA; this doesn’t cover fixed or recurring deposit interest at all. Resident senior citizens (60 and above) instead claim under old Section 80TTB, covering all deposit interest combined, savings, FD, and RD, up to ₹50,000. The two aren’t stacked: once eligible for 80TTB, a taxpayer claims that and not 80TTA. Both are available only under the old tax regime; the new regime, now the default, doesn’t permit either deduction at all. From Tax Year 2026-27, both are consolidated into new Section 153.

TDS on interest

Interest other than on securities is covered by Section 194A, while interest on securities and bonds falls under Section 193. Budget 2025 raised the Section 194A thresholds, for both the general case and specifically for senior citizens, meaning less interest income now gets TDS deducted at source than before. That said, TDS not being deducted, whether because the amount fell below the threshold or a valid Form 15G/15H was submitted, doesn’t make the interest tax-exempt; it still needs to be reported and taxed through the return.

The distinction that catches people is between deduction and liability. TDS is a collection mechanism, not a settlement. A depositor in the 30% bracket whose bank withheld 10% still owes the balance, and the higher the deposit book the larger that gap becomes, which is why interest income is a common source of Section 234B and 234C interest demands.

Accrual, and why the AIS often shows more than you expected

Banks report interest as it accrues, year by year, not only when a deposit matures. A five-year cumulative fixed deposit pays nothing out until the end, but interest is accruing and being reported annually throughout. Taxpayers who wait for the maturity year to declare the whole amount find the earlier years already reflected in the Annual Information Statement, and a mismatch flagged against them.

NSC interest is a variation on the same theme. For the first four years it is deemed reinvested rather than paid out, and that deemed reinvestment itself qualifies for a fresh 80C deduction each year, subject to the overall 80C limit, even though the interest is still taxable as it accrues annually. Only the final year’s interest is actually paid out and doesn’t get this treatment.

Interest for non-residents: which account you hold it in decides the tax

For a non-resident, the same deposit can be taxable or exempt depending purely on the account it sits in. Interest on an NRE account and on an FCNR account is exempt from Indian income tax so long as the holder qualifies as a person resident outside India under FEMA. Interest on an NRO account is fully taxable, and is withheld at source at a considerably higher rate than a resident faces, subject to any relief the applicable treaty allows.

The trap sits at the point of return. NRE exemption is tied to residential status, not to the account label, so an NRI who becomes a resident again does not keep the exemption merely because the account is still open. The account has to be redesignated, and interest from the point of change is taxable. This is one of the more common things missed in the year of return.