Tax on Interest Income in India: FD, Savings Account, PPF, Bonds, and P2P — What's Taxable and What's Not

Interest income is one of the most under-declared income categories in India — partly because people assume TDS is the final tax, and partly because most people don't realize that savings account interest above ₹10,000 is taxable. Here's the complete picture.

The Basic Rule

All interest income is taxable under the head "Income from Other Sources" — unless specifically exempted by law. The exemptions are narrow and specific. If you're not sure about a particular interest income, assume it's taxable.

Fixed Deposit Interest

Taxable at your slab rate. Fully and completely. There is no exemption.

• Banks deduct TDS at 10% if total FD interest from that bank exceeds ₹40,000/year (₹50,000 for senior citizens)
• TDS is an advance tax, not the final tax. If you're in 30% bracket, you pay the remaining 20% via ITR.
• If you're in the 0–5% bracket, you may be entitled to a refund of TDS deducted.

Form 15G/15H: Prevents TDS deduction if your total income is below the taxable limit. Submit to each bank at the start of every financial year.

Savings Account Interest

Section 80TTA provides a deduction of up to ₹10,000 on savings account interest for individuals below 60. Only savings accounts — not FD, RD, or recurring deposits.

Section 80TTB for senior citizens (60+): deduction of up to ₹50,000 on interest from ALL bank deposits — savings accounts, FDs, and RDs combined.

For most salaried individuals: Savings account interest is first added to income, then ₹10,000 deduction is applied. If you earn ₹15,000 in savings account interest, ₹5,000 is taxable.

Both 80TTA and 80TTB are available only under the old tax regime. Under the new regime, all savings account interest is fully taxable.

PPF Interest — 100% Tax-Free

PPF interest is exempt from tax under Section 10(11) — completely. No TDS, no reporting required in ITR (though best to disclose). This is one of only a handful of investments with genuinely tax-free interest.

Same applies to EPF interest (for employee contributions within the annual limit).

Government Bond Interest

Tax-free bonds (issued by NHAI, IRFC, PFC, REC during specific windows): Interest is completely exempt from tax. These haven't been issued since 2016 but are still traded on exchanges.

RBI Floating Rate Savings Bonds (7.35% currently linked to NSC): Taxable at slab rate. Not tax-free despite being RBI-issued.

G-Sec / Government Securities: Interest (coupon) is fully taxable at slab rate. Capital gains on selling before maturity are taxable as well.

NSC Interest

NSC interest is taxable — but with a quirk. NSC interest is deemed to be reinvested automatically every year. So you get an 80C deduction on the reinvested interest each year (except the final year when it's actually paid out).

Net effect: NSC interest is effectively tax-neutral in years 1–4 (the deduction offsets the income). Only year 5's interest (the accumulated total) becomes taxable in the year of maturity. For higher tax brackets, this can be meaningful.

Corporate Bond Interest

Fully taxable at slab rate. If purchased at a discount (zero coupon bonds), the discount is taxed as income on maturity — not as capital gains.

For listed bonds sold before maturity on exchange: STCG if held < 1 year (at slab), LTCG at 10% without indexation if held > 1 year.

P2P Lending Interest

Income from P2P lending platforms (Liquiloans, LenDenClub, Faircent, CRED Mint) is taxable as "Income from Other Sources" at full slab rate. There's no special treatment. Additionally, bad debt (borrower default) can be claimed as a loss only against interest income from P2P, not against other income — with restrictions.

P2P income is often under-declared. The IT department has been increasing scrutiny on fintech-linked income — report it correctly.

The Form 26AS Check

Banks, companies, and financial institutions report interest paid to the IT department. Your AIS (Annual Information Statement) will show:

• FD interest reported by each bank
• Savings account interest
• Bond interest

Cross-check your AIS before filing ITR. If AIS shows ₹25,000 in FD interest from a bank you forgot to account for, you need to declare it. Mismatch = automatic notice.

Tax-Efficient Alternatives to FDs

If FD returns after tax are too low:

• PPF: 7.1% tax-free beats 7.5% FD at 30% slab (effective 5.25%)
• VPF: 8.25% tax-free for salaried employees — best guaranteed return
• Debt mutual funds held 3+ years: Taxed at 20% with indexation (currently under revision — verify latest rules at time of investing)
• Senior Citizen Savings Scheme (80+): 8.2% for senior citizens — taxable but higher base rate

Quick Reference

Understanding which interest income is taxable and at what rate is the first step to building a tax-efficient savings structure. The goal isn't to avoid tax — it's to choose instruments that give you the best after-tax return for your risk level.