Taxation of Interest and other incomes
Income from dividends
Dividend is a reward that the company gives to its shareholders. The co-operative societies also pay the dividend to their shareholders. This dividend may be paid in cash or stocks or any other form. Such dividend is generally a part or share of the profits that the company generates through its business. The surplus profits are accumulated and credited to the reserves account in the balance sheet and the dividend is paid out from such reserves.
It is not obligatory or mandatory on the company to pay such dividends. The company may decide to re-invest the surplus in the business or assets of the company than paying the same as dividends. The decision about payment of dividends or otherwise is taken by the Board of Directors of the company and get that approved from shareholders of the company.
Taxability of dividend income from domestic companies
The taxability of dividend received from domestic companies is decided as per section 115BBDA of the Income Tax Act. From Assessment Year 2017-18 the dividend income from domestic companies upto Rs. 1000000/- is exempt from tax. The amount of dividend above that amount is taxable at the rate of 10% of such an amount.
Explained:
For A Y 2018-19, Smt. Shreya received a dividend of Rs. 500,000/- from company A, Rs.700,000/- from company B and Rs. 800,000/- from company B and the total amount of dividend received is thus Rs.20,00,000/-. The amount of taxable dividend in the hands of Smt. Shreya is Rs. 10,00,000/- and the exempt amount of dividend is Rs.10,00,000/-. Thus she is liable to pay tax at the rate of 10% on such taxable amount and hence, she is liable to pay tax of Rs.100,000/- in total on the dividend income.The taxpayer cannot claim any kinds of expenses against this dividend income nor can he claim any set off of past losses of any kind.
Taxability of dividend income from foreign companies
The dividend income from foreign companies is taxable as income from other sources. It is taxed at the normal rates as per the tax slab in which a particular taxpayer is paying tax however, if the taxpayer has paid tax in a foreign country on the same income, he must check whether that country has any Double Taxation Avoidance Agreement (DTAA) with that country. If that country has a DTAA with India then the tax liability may be determined after claiming tax relief to that extent. The taxpayer is having the option of paying tax either as per DTAA or as per Income tax Act.
The income from dividend is taxable as Income from Other Sources.
The dividend from co-operative societies
The income received by the taxpayer from the co-operative society of which he/she is a member is taxable as income from other sources and taxed at normal rates of tax.
Dividend Distribution Tax (DDT)
The domestic companies in India need to pay tax on the amount of dividend distributed by them at the rate of 15% of the amount. This is irrespective of whether the company is liable to pay tax on its income or not.
This tax is to be paid at the date which is earlier amongst three dates i.e. date of declaration of dividend, date of distribution of dividend and date of actual payment of dividend.
This tax is not to be claimed as a credit against any tax liability by the company which pays DDT.
What is meant by Income from Interest?
Interest income is earned from investments that earn interest. Such investments commonly are deposits in savings bank account or a certificate of deposit like Fixed Deposits, Recurrent Deposits, and Inter-Corporate Deposits etc.
Sometimes, the interest income is also earned on the overdue receivables from customers and is based upon the principle that the customers are using the money of the person who had sold goods to them and did not receive the consideration in exchange.
There is a difference between the dividend income and interest income. The dividend is paid to the holders of a company’s common or a preferred stock and represents a distribution of the earnings of the company which pays the said dividend income.
The taxability of income from dividend and income from interest is different in the Income tax Act.
What is the taxability in case of different types of interest?
Sr. No. | Types of interest income | Taxable (Yes/No) | Head of income | Deduction available? (Yes/No) | TDS applicable (Yes/No) |
|---|---|---|---|---|---|
1 | Interest from Savings Bank account | Yes | Income from other sources | Yes. But only up to Rs. 10000/- u/s 80TTA of the IT Act | Yes |
2 | Interest from Fixed Deposits | Yes | Income from other sources | No | Yes |
3 | Interest from Post office Deposits | Yes | Income from other sources | No | Yes |
4 | Interest on Recurring Deposits | Yes | Income from other sources | No | Yes |
5 | Interest on unsecured deposits | Yes | Income from other sources | No | Yes |
6 | Interest on overdue receivables | Yes | Income from other sources or business income (depending upon specific conditions) | No | Yes. But depends upon method of accounting |
7 | Interest on Income tax refund | Yes | Income from other sources | No | No |
Interest on savings bank account:
In your bank statement, the entry of interest credit is shown as below:
24 Sep | 24 Sep | TO TRANSFER-INB | 1,809.48 | JSBI5684023609I | 11,716.93 |
2017 | 2017 | BookMyshow.com BOOK_SHOW Payments- | GACBQDHF9 TRANSFER TO | ||
24 Sep | 25 Sep | CREDIT INTEREST– | 391.00 | 12,107.93 | |
2017 | 2017 |
Since these amounts are smaller, those are often missed by taxpayers while filing the ITR. These must be reported since they may attract the penalty after detection by the Assessing Officer. The income from interest on savings bank account is taxable as income from other sources. This income needs to be offered to tax as Income from other sources.
Deduction available on interest income from savings bank account
This income is eligible for deduction under section 80TTA of the Income tax Act. Such deduction is eligible up to an amount of Rs.10,000/-. Therefore, if the income from interest on savings bank deposits is Rs.50000/-, you will get a deduction of Rs.10, 000/- and rest Rs.40,000/- would be taxable income from other sources.
TDS on interest income
If the income from interest exceeds Rs.10,000/- it will suffer the TDS at the rate of 10% on the amount of interest paid by the bank to the payee. Such TDS amount will be reflected in the Form 26AS of the taxpayer. However in case of taxpayers more than 60 years of age, this limit of interest income is Rs.50, 000/-
PART A – Details of Tax Deducted at Source
Interest on Fixed Deposits/Time Deposits/Recurring Deposits
The interest on FD/RD/TD is accrued periodically as per time periods of these deposits. Such an amount of interest though may not actually be paid but is credited to the amount of FDs and is paid to the depositor at the time of maturity of such deposits.
Even though the amount of interest is not actually paid by the bank, the taxpayer depositor must report such an interest income in his ITR as income from other sources and pay tax on the same. If the tax is deducted from the interest income, then such an amount of tax may be added to the net interest income received by the taxpayer and the resultant gross income from interest should be included in total income under ‘income from other sources.’
Such reporting of income may depend upon the method of reporting followed by the taxpayer. If the taxpayer wishes to report such an income from interest on FDs and deposits only on receipt of such income, he may follow it on a consistent basis. However, it is advisable to pay tax on such an income whenever such an income accrues to the taxpayer, since at maturity the amount of interest may be of a higher amount and that may push the income of the taxpayer in a higher tax slab.
TDS on interest from FD/TD/RD
The payer bank is required to deduct TDS on the amount of interest paid to the depositor at the rate of 10% of the amount of interest income, if such an interest amount exceeds Rs. 10,000/- or Rs. 50,000/- in case of senior citizens.
The rate of deduction of tax (TDS) at source on such income is at 10%; however, if the taxpayer does not provide his PAN to the deductor bank, then the TDS may be deducted at the rate of 20% of the interest income.
In case, income of the taxpayer is below the limit of taxable income i.e less than Rs. 2,50,000/- then he may need to submit Form No. 15G and Form No. 15H to the payer bank asking not to deduct the tax (TDS).
Interest on Income tax refund
The income tax paid in excess of the liability of the taxpayers is refunded to the taxpayer as refund under section 244A of the Income tax Act. This interest is taxable as income from other sources and no tax (TDS) is deducted on such an amount of interest on refunds. There is no deduction on account of expenses allowable against interest on income tax refunds.
Deductible expenditure from interest income
Any expenditure linked directly with earning of income from interest on FDs, is deductible from the interest income. If a person borrows loans and deposits them in the bank as Time Deposits or Recurring Deposits or Fixed Deposits, then the net income from interest earned on such loans has to be computed after deducting the amount of interest paid by such a taxpayer against the loans borrowed (which were invested as fixed deposits/Time Deposits or Recurring Deposits)
FAQs on interest income and TDS thereon
Question: Is the TDS deductible on the amount of interest paid by the partnership firm to the partner?
Answer: No. Section 194A has exempted specifically such payments from the TDS liability.
Question: Is the TDS deductible on the amount of interest paid by the Co-operative society to it’s members or other co-operative societies?
Answer: No. Section 194A has exempted specifically such payments from the TDS liability.
Question: I am having bank accounts in different branches of the same bank. The interest amount in any one of the branches does not exceed Rs. 10000/-. Is the TDS deductible from the amount of interest income?
Answer: Yes. As per section 194A of the Act the core banking solutions of the banks and societies have to be taken into account for considering whether the TDS has to be applied or not.