Legal Reference
Section 56 (interest as other sources), Section 80TTB/80TTA equivalent, TDS Sections 393A-393C, NSC accrual, P2P lending, bond interest, ITA 2025
1. Interest Income is Pervasive
Interest income is the most commonly underreported income in Indian ITRs. AIS captures interest from ALL banks automatically — including accounts the taxpayer may have forgotten about. Every bank FD, savings account, recurring deposit, post office scheme, bond, and P2P lending platform generates taxable interest that must be reported in Schedule OS (Other Sources) of the ITR.
2. Bank Interest: FD, RD, Savings
| Type | Tax Treatment | TDS Rate | TDS Threshold |
|---|
| Savings account interest | Slab rate; Rs 10K deduction (80TTA, old) | None | N/A |
| Fixed deposit interest | Slab rate | 10% | Rs 40K (Rs 50K senior) |
| Recurring deposit interest | Slab rate | 10% | Rs 40K (Rs 50K senior) |
| NRE account interest | Exempt — Schedule II | None | N/A |
| NRO account interest | Slab rate (30% TDS for NRI) | 30% (NRI) | None |
3. Post Office Schemes
- Post Office Savings Account: interest taxable; Rs 10,000 deduction under 80TTA (old regime)
- Post Office Time Deposit (POTD): taxable at slab; no TDS (but appears in AIS)
- NSC (National Savings Certificate): taxable on accrual basis each year; deemed reinvested → qualifies for Section 123 deduction in years 1-5; final year interest taxable without deduction
- SCSS (Senior Citizen Savings Scheme): taxable at slab; 10% TDS above Rs 50,000; qualifies for Rs 50K interest deduction (80TTB, old regime)
- KVP (Kisan Vikas Patra): taxable at slab on accrual basis; no TDS
- PPF: interest fully exempt — EEE
4. Bond Interest
- Government securities (G-Secs): taxable at slab; TDS at 10% above Rs 10,000/year (Section 193)
- Corporate bonds: taxable at slab; TDS 10% above Rs 5,000
- Tax-free bonds (NHAI, IRFC, HUDCO): interest fully exempt — issued before 2018 still outstanding
- Sovereign Gold Bonds: 2.5% interest taxable; TDS applicable
- RBI Floating Rate Bonds: taxable at slab
5. P2P Lending Interest
Peer-to-peer lending platforms (RBI-regulated NBFCs) pay interest to lenders. This interest is taxable as Other Sources income at slab rate. No TDS is typically deducted by P2P platforms. Lenders must self-report P2P interest in ITR. AIS may or may not capture this depending on platform reporting. Losses on P2P lending (defaults) are treated as business losses if lending is carried out as a business.
6. Interest on Income Tax Refund
Interest received on income tax refund under Section 296 (0.5% per month on delayed refund) is taxable as income from other sources in the year of receipt. This surprises many taxpayers who assume refund-related income is not taxable.
7. Why TaxClue
Complete interest income reporting — especially across multiple banks, post office schemes, and P2P platforms — is critical to avoid AIS mismatch notices. TaxClue aggregates all interest income from AIS and files accurate ITR. Contact us under ITA 2025.
Disclaimer
This article is for general informational and educational purposes only. It does not constitute legal, financial, or professional tax advice. Readers are advised to consult a qualified Chartered Accountant or tax professional before making any decisions. TaxClue Consultech Pvt Ltd accepts no liability. All case studies and examples in this article are illustrative only and do not represent actual persons or transactions.
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❓ Frequently Asked Questions
How is bank FD interest taxed?
Bank FD interest is taxable at the investor slab rate as income from other sources under Section 56 of ITA 2025. TDS at 10% is deducted by the bank when annual interest from that bank exceeds Rs 40,000 (Rs 50,000 for senior citizens). The TDS is a credit — if your slab rate is 20% or 30%, additional tax is due when filing ITR. Interest must be reported across ALL banks combined in Schedule OS.
How is NSC interest taxed?
NSC interest accrues annually but is paid at maturity. For income tax, NSC interest is taxable on an accrual basis each year — not just at maturity. In years 1-5 (for 5-year NSC), accrued interest is deemed reinvested and qualifies for Section 123 deduction within the Rs 1.5L limit under old regime. In the final year, the interest is taxable as income without a corresponding deduction since no reinvestment occurs. No TDS on NSC.
What deduction is available on savings account interest?
Under the 80TTA equivalent in ITA 2025 (old regime only), interest from savings bank accounts and post office savings accounts is deductible up to Rs 10,000 per year. Senior citizens (60+) get a broader Rs 50,000 deduction under 80TTB equivalent on all interest — FD, savings, and post office combined. In the new tax regime, no interest deduction is available.
Is P2P lending interest taxable?
Yes. Interest earned from peer-to-peer lending platforms is taxable as income from other sources at the investor slab rate. P2P platforms (RBI-regulated NBFCs) typically do not deduct TDS. Lenders must self-declare this income in ITR Schedule OS. AIS may or may not capture P2P interest depending on whether the platform reports to the IT Department. Always report P2P interest regardless of AIS.
Is interest received on income tax refund taxable?
Yes. Interest received under Section 296 of ITA 2025 on delayed income tax refunds (0.5% per month when refund is delayed beyond 1 year from due date) is taxable as income from other sources in the year of receipt. Many taxpayers are surprised to receive a Form 26AS entry for this interest and must include it in their ITR. The original refund principal is not income — only the interest component is taxable.
