Income Tax (Year: 2021)
Mutual Funds Taxes
Source of Income from Mutual Funds
Before we delve deeper into the taxation angle, let us discuss the sources of income from mutual funds.
Income from mutual funds can be either from –
- Regular dividend
- Sale of shares in funds
Let us discuss dividends first.
Dividends received from funds are exempted from tax. A DDT of 25% is levied on non- equity- oriented schemes along with a 12% surcharge and 4%cess, making an effective DDT amounting to 29.12% for both resident Indians and NRIs.
Capital gain tax on mutual funds
Before understanding the taxation structure on capital gains, we need to understand capital gains from the point of the mutual fund holding period.
Since capital gains are taxed by income tax authorities, the quantum of tax to be paid depends on the holding period. The holding period can be classified into two broad categories – Short-term and long-term.
The following table gives an idea of what constitutes short-term and long-term
Taxation
a) Long-term capital gains
1.Tax saving equity funds
- An investment made under ELSS (Equity Linked Savings Schemes) qualifies for tax exemption under section 80C. The total savings under 80C that qualifies for exemption is Rs.1.5 lakhs (max).
- Apart from ELSS, other payments like LIC, PF, Children’s school fees, etc also qualify.
- If an investor has no other deduction in 80C, he can invest a maximum of Rs.1.5 lakhs to qualify for tax exemption. If the investor is in the 20% tax bracket, he saves Rs.30000 tax.
- If the investor claims a Rs.50,000 exemption on payment of children’s school fees, PF, etc, he can invest Rs.1 lakhs in ELSS. The maximum permissible exemption under 80C is Rs.1.5 lakhs
- ELSS comes with a locking period of 3 years. The investor can’t redeem the units before 3 years.
- Long Term Capital Gain (LTCG) Tax on redemption is exempted up to Rs.1 lakh. If LTCG is more than 1 lakhs, the applicable tax is 10% without indexation.
2. Non-tax saving equity funds
Long Term Capital Gain (LTCG) Tax on redemption is exempted up to Rs. 1 lakh. If LTCG is more than 1 lakh, the applicable tax is 10% without indexation.
b) Short-term capital gains
Short-term capital gains are taxed @ 15%
- Debt funds
- Long-term capital gains (=>36 months) on debt funds are taxed at 20% after indexation. (Indexation takes into consideration the inflation between the year of purchase of debts funds and the year of sale of debt funds)
- Short-term capital gains (< 36 months) on debts funds are added to your income and taxed as per the applicable slab your income falls under (5% or 20% or 30%)
2. Balance fund
They are equity- oriented funds that invest 65% (minimum) of assets in equities. These are taxed as, “Non-tax savings equity funds”.
3. Systematic Investment Plan (SIP)
Each investment is considered a new venture and capital gains are taxed accordingly.
The following example will help to understand tax:
One investor invests Rs 5,000 per month starting from April 2020
Another investor invests Rs 60,000 lump sum at the same time
Both redeem their entire funds.
In the case of a SIP investor, Rs 5,000 will qualify for tax exemption as the investment made in April 2020 would have exceeded more than 1 year as of May 2021
In the case of an investor who invests Rs 60,000 lump sum in April 2020, the entire capital gain is exempted.
When & How to Pay Income Tax on Fixed Deposit’s Interest Income?
Fixed Deposits (FDs) allow you to exploit the complete potential of Section 80C to deduct Rs 1.5 lakh from your taxable income. It also ensures capital protection along with some interest returns. However, the interest income earned on the fixed deposit is taxable. Seldom do investors think about paying tax on the interest income on time. This article will cover when and how to pay income tax on FD interest income.
How is interest income taxed?
Interest income from Fixed Deposits is fully taxable. Add it to your total income and get taxed at slab rates applicable to your total income. It is to be reported under the head ‘Income from Other Sources’ in your Income Tax Return.
Banks deduct tax at source at the the time of crediting interest to your account if the amount of interest is beyond Rs.40,000 for individuals other than senior citizen.(in case of senior citizen the threshold is Rs.50,000).
Hence it should be remembered that the TDS is deducted at the time of credit of interest and not when the FD matures. So, if you have an FD for 3 years – banks shall deduct TDS at the end of each year. (See below for more details on TDS on FDs).
Understanding TDS:
When you receive certain payments the person paying you has to deduct tax before making the payment. This tax deducted at source is called TDS, which they pay to the Central Government.
You will receive the credit of amount net of tax. You then have to add the gross amount to your income while reporting in your Income Tax return. As against this, the credit of TDS is also provided from the total tax liability or TDS refund is offered in case of nil tax liability.
For an example, if you earn FD interest of Rs.100, the bank would deduct 10% TDS i.e Rs.10 and deposit it to the government.While reporting the interest income in ITR, you have to report entire interest earned of Rs.100 in your ITR and claim the TDS deducted by the bank of Rs.10 as TDS refund or tax credit from the outstanding liability, as the case may be.
How to calculate tax on interest income?
Add the interest income to your total income in your Income Tax Return each year (even though, it may not be paid out). Interest income is to be reported under the head ‘Income from other sources’ while filing ITR. See which tax slab rate you fall into.
The Income Tax Department will adjust the TDS (which has already been deducted) against your final tax liability.
If the bank does not deduct TDS from your interest income, the total interest income earned from your fixed deposits in a particular financial year is to be added to your total income and pay tax on it.
It is not advisable to wait until the maturity of your FD when interest is actually received– to report the interest income. This is because the accumulated interest may push you up to a higher slab and you may end up paying the more tax.
You can view the details of TDS deducted on any of your income by viewing your Form 26AS.
Let’s understa
When & How to Pay Income Tax on Fixed Deposit’s Interest Income?
Fixed Deposits (FDs) allow you to exploit the complete potential of Section 80C to deduct Rs 1.5 lakh from your taxable income. It also ensures capital protection along with some interest returns. However, the interest income earned on the fixed deposit is taxable. Seldom do investors think about paying tax on the interest income on time. This article will cover when and how to pay income tax on FD interest income.
Table of contents
How is interest income taxed?
Interest income from Fixed Deposits is fully taxable. Add it to your total income and get taxed at slab rates applicable to your total income. It is to be reported under the head ‘Income from Other Sources’ in your Income Tax Return.
Banks deduct tax at source at the the time of crediting interest to your account if the amount of interest is beyond Rs.40,000 for individuals other than senior citizen.(in case of senior citizen the threshold is Rs.50,000).
Hence it should be remembered that the TDS is deducted at the time of credit of interest and not when the FD matures. So, if you have an FD for 3 years – banks shall deduct TDS at the end of each year. (See below for more details on TDS on FDs).
Understanding TDS:
When you receive certain payments the person paying you has to deduct tax before making the payment. This tax deducted at source is called TDS, which they pay to the Central Government.
You will receive the credit of amount net of tax. You then have to add the gross amount to your income while reporting in your Income Tax return. As against this, the credit of TDS is also provided from the total tax liability or TDS refund is offered in case of nil tax liability.
For an example, if you earn FD interest of Rs.100, the bank would deduct 10% TDS i.e Rs.10 and deposit it to the government.While reporting the interest income in ITR, you have to report entire interest earned of Rs.100 in your ITR and claim the TDS deducted by the bank of Rs.10 as TDS refund or tax credit from the outstanding liability, as the case may be.
How to calculate tax on interest income?
Add the interest income to your total income in your Income Tax Return each year (even though, it may not be paid out). Interest income is to be reported under the head ‘Income from other sources’ while filing ITR. See which tax slab rate you fall into.
The Income Tax Department will adjust the TDS (which has already been deducted) against your final tax liability.
If the bank does not deduct TDS from your interest income, the total interest income earned from your fixed deposits in a particular financial year is to be added to your total income and pay tax on it.
It is not advisable to wait until the maturity of your FD when interest is actually received– to report the interest income. This is because the accumulated interest may push you up to a higher slab and you may end up paying the more tax.
You can view the details of TDS deducted on any of your income by viewing your Form 26AS.
Let’s understand this by way of an example:
- Ritwik falls in the 20% tax bracket. He has 2 Fixed Deposits with a bank of Rs 1,00,000 each for a period of 3 years @ 6% interest per annum. In the first year, Ritwik’s interest income is Rs 6,000 from each of the FDs, total interest accrued is Rs 12,000 in the first year. Bank does not deduct TDS for annual FD interest below Rs 40,000.
- Another example , Mr. Anurag has a fixed deposit of Rs 10 lakh @ an interest rate of 6% p.a. He receives an annual interest of Rs 60,000. The bank deducts TDS on the whole of Rs 60,000 at 10% i.e Rs.6000. The prescribed rate of TDS is 10%.
When to pay tax on interest income?
If there is a tax liability on adding interest income to your total income, then the same is required to be paid on or before 31st March of the financial year. This is how you can pay any tax that is due.
However, if tax payable after the inclusion of your interest income in your total income is more than Rs.10,000 – then you are liable to pay Advance Tax. Hence the rules of quarterly payment of advance tax in installments are to be compiled.
Understanding TDS in relation to FDs
When does the bank not deduct TDS:
If your interest income from all FDs with a bank is less than Rs 40,000 in a year, the bank cannot deduct any TDS. The limit is Rs 50,000 in the case of a senior citizen aged 60 years and above.
Prior to Budget 2019, the limit of TDS on interest income was Rs. 10,000.
When does the bank deduct TDS @ 10%
The bank estimates your interest income for the year from all the FDs you have with the bank. There would be a 10% TDS deduction if your interest income exceeds Rs 40,000 (Rs 50,000 in the case of senior citizens). Prior to Budget 2019, the limit of TDS on interest income was Rs. 10,000.
When does the bank deduct TDS @ 20%:
In case you do not provide your PAN information to the bank, they will deduct 20% TDS. So do make sure that the bank has your PAN details.
When your overall income is less than Rs. 2.5 lakh
No TDS is deductible when your total income is less than the minimum taxable amount. Some investors may have more than Rs 40,000 interest income in a year, but their Total Income (including interest income) is less than the minimum exempt income (Rs 2.5 lakh for FY 2019-20).
When there is no tax payable by the individual, the bank cannot deduct TDS. However, in such cases, the bank will not deduct TDS only where you submit Form 15G or 15H to claim interest income without TDS.
How to ensure zero TDS deduction by the bank
The only way to make sure that no TDS is deducted by the Bank is when your total income is not subject to tax and you submit Form 15G and Form 15H to the bank before the due date.
Submit these forms at the beginning of each financial year to avoid the whole hassle of additional TDS deduction and subsequent refund from the IT Department.
Interest from FD for senior citizens
Senior citizens receiving interest income from FDs, savings account and recurring deposits can avail of income tax deduction of up to Rs 50,000 annually. This is by way of an amendment vide Finance Act 2018.
Please read out the detailed article on this here, where we have discussed provisions of section 80 TTB. If the senior citizen’s interest income from all FDs with a bank is less than Rs 50,000 in a year, the bank cannot deduct any TDS.
Hope this helps you understand taxes on FD interest income in detail, do reach out to us if you have any questions!
