Tax on Interest Income: FD, RD, Bonds & SGBs Explained

Introduction

Interest-earning investments such as fixed deposits, recurring deposits, bonds, and sovereign gold bonds are widely used by Indian investors for stability and income. However, the taxation of interest income is often misunderstood, leading to surprises at the time of filing income tax returns.

This article explains fd income tax, income tax on fixed deposit interest, and when interest income may be considered tax-free in India, purely from an educational perspective.

What Is Interest Income Under Income Tax?

Interest income refers to earnings received from lending money to banks, government entities, or issuers of debt instruments.

Under Indian income tax laws:

• interest income is generally taxable

• it is taxed under “Income from Other Sources”, unless specifically exempt

• taxability applies irrespective of payout frequency

Understanding classification is the first step in managing tax compliance.

FD Income Tax Explained

FD income tax applies to interest earned on bank fixed deposits.

Key points:

• interest earned on FDs is fully taxable

• taxed as per the individual’s income tax slab

• applies whether interest is paid monthly, quarterly, or at maturity

There is no separate lower tax rate for fixed deposit interest.

Income Tax on Fixed Deposit Interest

Income tax on fixed deposit interest applies on an accrual basis.

This means:

• interest is taxable in the year it is earned

• even if interest is not withdrawn

• cumulative FDs are also taxed annually

Senior citizens may have higher interest exemption limits, subject to applicable provisions.

Taxation of Interest from Bonds

Interest earned from bonds is generally:

• taxable as Income from Other Sources

• taxed at slab rate

• subject to TDS, depending on issuer and thresholds

The frequency of coupon payment (monthly, quarterly, annual) does not change tax treatment.

Sovereign Gold Bonds (SGBs): Interest & Tax Treatment

Sovereign Gold Bonds provide:

• fixed annual interest paid periodically

• interest income that is taxable at slab rate

However:

• capital gains on redemption at maturity may be exempt for certain investors

• secondary market sales may attract capital gains tax

Interest income from SGBs is not tax-free.

Is There Any Tax-Free Interest Income in India?

The concept of tax-free interest income in India applies only in specific cases.

Examples include:

• interest from notified tax-free bonds (when applicable)

• certain government-specified instruments

• Unless explicitly notified, most interest income is taxable.

TDS on Interest Income

Tax Deducted at Source (TDS) may apply when:

• interest exceeds prescribed thresholds

• issuer or bank deducts tax before credit

Important points:

• TDS does not mean final tax liability

• actual tax depends on slab rate

• excess TDS can be claimed as refund

Tracking TDS certificates is important for return filing.

Reporting Interest Income in ITR

Interest income must be:

• reported under “Income from Other Sources”

• disclosed even if TDS is deducted

• aggregated across all instruments

Failure to report interest income may lead to notices or penalties.

Common Misconceptions

Misconception 1: Monthly interest is tax-free

Payout frequency does not change taxability.

Misconception 2: Only withdrawn interest is taxable

Accrued interest is taxable even if not withdrawn.

Misconception 3: All government-linked interest is tax-free

Tax exemption applies only if explicitly notified.

Conclusion

Understanding fd income tax, income tax on fixed deposit interest, and the limited scope of tax-free interest income in India is essential for accurate tax planning. Interest-earning investments provide stability, but their post-tax returns depend heavily on correct tax treatment and reporting.

Clarity on taxation helps investors set realistic income expectations and remain compliant.

Disclaimer

This blog is intended solely for educational and informational purposes. The bonds and securities mentioned herein are illustrative examples and should not be construed as investment advice or personal recommendations. BondScanner, as a SEBI-registered Online Bond Platform Provider (OBPP), does not provide personalized investment advice through this content.

Readers are advised to independently evaluate investment options and seek professional guidance before making financial decisions. Investments in bonds and other securities are subject to market risks, including the possible loss of principal. Please read all offer documents and risk disclosures carefully before investing.