Taxability of Interest Income in India: Unpacking Credit Card, Savings, and FD Interest
India’s taxation system encompasses various income types, including interest income from savings accounts, fixed deposits, and credit card balances. Under the Income Tax Act, 1961, such income falls under “Income from Other Sources” and is taxable unless explicitly exempted. Many individuals assume interest earnings are minimal or tax-free, but they are subject to taxation. Financial institutions classify credit card interest as part of their income, while for users, it is a cost. However, any interest earned by banks is taxable, ensuring all interest earnings are covered under the tax framework. This article explores these aspects in detail.
Understanding Interest Income Taxation in India
Nature of Interest Income
Interest income refers to the earnings from the principal amount invested in
different financial instruments. In India, this includes interest on:
- Savings bank accounts
- Fixed deposits (FDs)
- Recurring deposits (RDs)
- Bonds, debentures, and government securities
- Credit Card Interest: Income for Banks and an Expense for Consumers
For most people, the interest earned on savings accounts, FDs, and RDs
constitutes a major part of their annual income. Such income is clubbed with
other sources of income like salary, business profits, and capital gains and is
taxed according to the applicable income tax slab.
Taxable Income and Exemptions
The Income Tax Act does not apply a general interest income exemption;
however, specific provisions are put in place which allow for exemptions on
certain bases.
-Section 80TTA allows the individual and Hindu Undivided Families (HUFs) to
claim an interest income of up to Rs. 10,000 from savings bank accounts.
-Section 80TTB extends this relief to senior citizens (60 years and above)
to claim deduction up to Rs. 50,000 on interest earned from savings account and
also on fixed and recurring deposits.
These deductions are especially advantageous for small business taxpayers
who can now prevent the tax of small, unearned amounts of interest from
occurring.
Interest Income from Savings Accounts
Calculation and Tax Treatment
Interest earned on savings account is computed every day using the balance
at close and then released periodically, usually every month or quarter. Even
if banks don't normally debit TDS on savings account interest for a resident
individual, one has to report its entire interest credited in the ITR under the
head "Income from Other Sources."
Under section 80TTA, if the aggregate interest income of all savings
accounts during the previous year does not exceed Rs. 10,000, then such income
is deemed to be wholly exempted from tax for individuals and HUFs. Senior
citizens, however, are eligible for a higher limit under section 80TTB.
Practical Example
Now consider a person having three saving bank accounts. Here, interest
rates are different. If the combined annual interest of all accounts aggregates
to Rs. 9,000, then the whole amount is completely exempt under Section 80TTA.
If the total exceeds Rs. 10,000, the excess amount becomes taxable based on the
income tax slab of the individual.
Fixed Deposit and Recurring Deposit Interest
Tax Deduction at Source (TDS)
Interest income from fixed deposits (FDs) and recurring deposits (RDs) is
fully taxable, and banks are mandated to deduct TDS if the annual interest
income exceeds prescribed thresholds amount to deduct TDS . For individuals
case below 60, the threshold amount is usually Rs.40,000, and for senior citizens
case, it is Rs. 50,000. If PAN details does not
provided, the TDS rate can deduct from 10% to 20%.
Once TDS is deducted, the taxpayer still needs to report the full amount of
interest income in the ITR and can claim credit for the TDS while computing the
final tax liability.
Avoiding TDS via Form Submission
Taxpayers whose total income falls below the taxable limit can submit Form
15G (for individuals below 60) or Form 15H (for senior citizens). This Form is
to be instruct banker not to deduct TDS on FD and RD interest. This helps in
receiving the full interest amount without immediate tax deduction, though the
income must still be reported during tax filing.
Credit Card Interest: Income for Banks and an Expense for Consumers
Defining Credit Card Interest
Credit cards offer all consumers the facility of "buy now, pay
later" within their limits. However, when the balance is not paid in full
by the payment date, interest is charged on the outstanding amount. Unlike
savings or FD interest, credit card interest is not earned by the cardholder,
but is instead charged by the issuer to its consumers as a fee for delayed
payment.
Perspective of the Credit Card Issuer
For banks and financial institutions, the interest earned from credit card
transactions forms an important part of their income portfolio. This income is
treated similarly to other types of interest income. The interest charged on
outstanding credit card balances is:
- Recorded as part of the bank’s total interest income.
- Subject to TDS (if applicable, based on the bank’s policies and overall income thresholds).
- Taxed at the corporate tax rate for banks and financial institutions, as part of their overall profits.
Thus, from a regulatory perspective, credit card interest is fully taxable
in the same way as FD or RD interest.
Perspective of the Credit Card User
For the credit card user, the interest charged is an expense incurred on
borrowing money. This expense:
- Cannot be claimed as taxable income by the user.
- May only be considered a business expense if the card is used exclusively for business transactions, in which case the interest expense might be deductible against business income.
For most consumers, credit card interest increases the cost of purchases and
does not yield any tax benefit.
Legal Framework and Relevant Provisions
Key Sections of the Income Tax Act, 1961
The Income Tax Act, governs the taxation on interest income in India through
several key provisions which are as given below:
- Section 2(22): This section is define “income from other sources” to include all of interest income.
- Section 80TTA: This section provide deduction of up to Rs. 10,000 for interest earned on savings bank accounts for individuals and HUFs.
- Section 80TTB: This section is Extends the benefit to every senior citizens, allowing a deduction of up to Rs. 50,000 on interest income from savings accounts, fixed deposits, and recurring deposits.
- Section 194A: This section is mandates to banker to deduct TDS on interest income if the annual interest exceeds prescribed limits as discussion above.
There is no separate provision that exempts interest income from credit card
transactions. The same principles apply: if the interest is collected in India,
it is taxable unless a specific exemption applies.
TDS Provisions and Their Impact
The system of Tax Deducted at Source
plays a critical role in ensuring timely collection of taxes. For
instance:
- When banks credit interest on FDs or RDs, they deduct TDS if the income exceeds the applicable threshold.
- For credit card interest, while the process is part of the bank’s internal accounting, any interest income earned by the bank is subsequently aggregated and taxed.
TDS mechanisms help ensure that even if taxpayers do not voluntarily pay
their taxes, the income tax department receives tax revenue as the income is
earned.
Taxation of Interest Income for Non-Resident Indians (NRIs)
Basis of Taxation for NRIs
Non-resident Indians are taxable on income, which is actually received or is
deemed to have been received in India. These include interest on Indian bank
deposits. However, NRIs benefit from certain exemption and may relief under
Double Tax Avoidance Agreements.
An instance would be if the interest made from NRE accounts is taxed in
India due to Section 10(4) of Income Tax Act where it is a condition of
provisions of FEMA for its tax treatment. However, the interest taken from NRO
accounts is entirely taxable at greater rates, generally 30%.
Double Taxation Relief
There has been double taxation of the same income in the hands of one tax
authority on the same and by another, thereby increasing tax liabilities. It
has been, therefore, proposed to enter into a DTAA with many countries, which
not only helps alleviate double taxation of income but allows NRIs, at times,
to claim the credit for the taxes paid in India against tax liability in that
country.
Practical Implications and Examples
Banking Perspective
Consider a bank issuing credit cards with an annualized interest rate of 30%
on outstanding balances. The customer carries an average credit card balance of
Rs. 100,000, and over the year, the bank makes an interest amount of Rs. 30,000
on it. That is all this income is fully taxable as part of the total income of
the bank. Interest from other sources and this will be accounted for and taxes
will be remitted according to the corporate tax regime.
Consumer Perspective
For a credit card user, an interest accrual on outstanding balance is not
income but cost. Assume that a person incurs Rs. 5,000 in credit card interest
over the course of a year due to carrying a balance. This would not be
considered a taxable income for the user but is a financial charge and adds to
the effective cost of borrowed funds. Unless the individual uses the credit
card only for business purposes (in which case the interest might be deductible
as a business expense), this interest cannot be offset against taxable income.
Non-Resident Scenario
An NRI gets interest of Rs. 50,000 through the year in an NRO account. TDS
is deducted at 30%, and the gross interest earned is required to be declared in
the ITR. However, if the NRI is a resident of any country with which India
enjoys DTAA, then they might be able to get credit in respect of taxes withheld
in India against their tax liability in the country in which they are otherwise
resident. This mechanism ensures that the income is not effectively taxed
twice.
Special Considerations and Common Misconceptions
No Special Exemption for Credit Card Interest
A common misconception is that credit card interest might be treated
differently from other forms of interest. In reality, credit card interest is
not given any special treatment; it is simply another form of interest income
for the bank. The exemption provisions under Sections 80TTA and 80TTB do not
extend to credit card interest because it is not an income received by an
individual from a deposit—it is a charge imposed by the lender.
Reporting Requirements
Banks and financial institutions must maintain detailed records of all
interest income, including that from credit card transactions. These records
are essential for:
- Ensuring accurate TDS deduction.
- Reporting consolidated interest income in the financial statements.
- Complying with audit and tax filing requirements.
For individual taxpayers, accurate reporting of all interest income—even if
TDS has already been deducted—is crucial for reconciling tax liability during
ITR filing.
Impact on Tax Planning
Understanding the taxability of interest income can significantly influence
financial planning:
- For individuals: Properly utilizing deductions under Section 80TTA and 80TTB can reduce taxable income. Planning to keep interest income within the exemption limits may also be a strategy for those with modest savings.
- For businesses: While interest expenses (such as credit card interest incurred for business purposes) may be deductible, interest income earned by banks and financial institutions contributes to their taxable profits.
- For NRIs: Being aware of the differential treatment of NRE and NRO account interest, as well as the benefits of DTAA, can help in optimizing tax liabilities.
Conclusion
Interest income in India, whether from savings accounts, fixed deposits, or credit card operations, is taxable unless specifically exempted. Individuals can claim deductions under Sections 80TTA and 80TTB to reduce tax liability on small interest earnings. Credit card interest, however, is a borrowing cost for consumers, not taxable income. Financial institutions treat all interest earnings as taxable income. Tax Deducted at Source (TDS) ensures timely tax collection, and both residents and NRIs must report interest income in their tax returns. NRIs may benefit from DTAA provisions to avoid double taxation. The Indian tax system ensures uniform treatment of interest income, promoting compliance and financial prudence. Effective tax planning through exemptions and deductions helps individuals and businesses manage liabilities efficiently.
You may also read : Taxable income from other sources under Indian income tax law notes