Heads of Income
The Income Tax Department breaks down income into five heads of income for the purpose of income tax reporting:
- Income from Salary
- Income from House Property
- Income from Capital Gains/Loss
- Profits and Gains from Business and Profession
- Income from Other Sources
Income from Other Sources covers income that does not fall under any of the other heads of income.
Savings Bank Account – Interest Income
Interest that gets accumulated in your savings bank account must be declared in your tax return under income from other sources. Note that the bank does not deduct TDS from savings bank interest. Interest from fixed deposits and recurring deposits is taxable, while interest from savings bank accounts and post office deposits is tax-deductible to a certain extent. However, they are shown as under income from other sources. Interest income from a savings bank account or a fixed deposit or from a post office savings account are all shown under this head.
Deduction on Interest Income Under Section 80TTA
For a residential individual (age of 60 years or less) or HUF, interest earned upto Rs.10,000 in a financial year is exempt from tax. The deduction is allowed on interest income earned from:
- savings account with a bank;
- savings account with a co-operative society carrying on the business of banking; or
- savings account with a post office
Senior citizens are not entitled to benefits under section 80TTA.
Tax on Fixed Deposits
Fixed deposit interest that you receive is added along with other income that you have, such as salary or professional income, and you’ll have to pay tax on that income at a tax rate that applies to you. TDS is deducted on interest income when it is earned, though it may not have been paid.
Example: The bank will deduct TDS on interest accrued each year on a FD for 5 years. Therefore, it is advisable to pay your taxes annually instead of only paying them when the FD matures. With effect from 1 April 2018, senior citizens will enjoy an income tax exemption of up to Rs.50,000 on the interest income they receive from savings bank accounts, fixed deposits, recurring deposits with banks, post offices, etc., under Section 80TTB.
Avoiding TDS on Fixed Deposits
Banks are required to deduct tax when interest income from deposits held in all the bank branches put together is more than Rs.40,000 in a year (Prior to FY 2019-20, it was Rs.10,000). A 10% TDS is deducted if PAN details are available. It is 20% if the bank does not have your PAN details. The details of TDS deducted on Fixed Deposit Interest are in Form 26AS. If your total income is below the taxable limit, you can avoid tax deductions on fixed deposits by submitting Form 15G and Form 15H to the bank, requesting them not to deduct any TDS. Form 15H is for senior citizens (60 years or older); Form 15G is for everybody else. These forms are for residents only and for those whose taxes add up to zero. These forms must be submitted at the start of the financial year. If you missed submitting them, then you can claim a refund by filing an income tax return. These forms are valid for one year only. Therefore, they must be submitted each year to keep banks from deducting tax.
Reporting Fixed Deposit and Recurring Deposits in Your Tax Return
Reporting Fixed Deposits
If you have three FDs open, then add up all the interest income and enter it under ‘Other interest income’.
Reporting recurring deposit
When interest income from all the branches of the bank including from recurring deposits, exceeds Rs.40,000 (Rs.50,000 for senior citizens) in a financial year, a 10% tax on interest earned will be deducted. The interest earned should be shown in ‘income from other sources'.
Family Pension
If you are collecting a pension on behalf of someone who is deceased, then you must show this income under income from other sources. This will be added to the taxpayer’s income and tax must be paid at the tax rate that is applicable. There is a deduction of Rs.15,000 or one-third of the family pension received, whichever is lower from the Family Pension Income.
Taxation of Winnings from Lottery, Game Shows, Puzzles - Casual Income
If you receive money from winning the lottery, Online/TV game shows, races including horse races, card games and other games, gambling betting, etc., it will be taxable under the head Income from other Sources. The income will be taxable at flat rate of 30%, which after adding cess, will amount to 31.2%.
Dividend Income
Dividends received from investments, such as stocks, are taxed under “income from other sources”. However, as of the recent removal of the Dividend Distribution Tax (DDT), individuals receiving dividends need to include them in their total income and pay tax based on their applicable slab rates. Taxpayers can claim interest expense up to 20% of the dividend income. Also, if the total dividend amount exceeds Rs.5,000, the company deducts TDS at 10% while paying the dividend.
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Agriculture income
As per the Income-tax law, agricultural income covers 3 main activities:
- Rent or revenue earned from agricultural land situated in India.
- Income from agricultural activities such as the cultivation of the land, tilling of the land, sowing of seeds, planting, etc., and also includes subsequent operations which would make the product fit for use in the market like tending, pruning, cutting, harvesting, etc. Income derived from saplings or seedlings grown in a nursery would also be considered to be agricultural income.
- Income derived from farm building required for agricultural operations.
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Virtual Digital Assets (VDAs)
The virtual digital asset shall mean a cryptocurrency, NFT, etc. Any profit or loss from the sale of VDAs shall be charged to income tax at 30%, subject to the conditions on setting off losses against income.
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Income from Gifts
Taxation on gifts is covered by section 56 (2)(vi) of the Income Tax Act. Any gift received with or without consideration in excess of Rs.50,000 in a financial year will be taxed according to your slab.
- Any gifts received in cash exceeding Rs.50,000 shall be chargeable to tax.
- Any gifts received in kind (without any consideration) and the fair market value of such gift is more than Rs.50,000 then the aggregate value will be taxable in the hands of such individual.
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Interest on Income Tax Refund
The assessee is entitled to a refund of the excess tax paid when they have paid more than they are required to. Advance Tax (AT), Tax Deducted at Source (TDS), or Self-Assessment Tax (SAT) are three possible ways to pay excess taxes. To get an income tax refund, the individual must wait a few days after filing their income tax return. Interest on the refund for this time period will be paid to the taxpayer.
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Exempt Income
The PPF and EPF amount you withdraw after maturity is exempt from tax and must be declared as exempt income from income from other sources. Note that: The EPF is only tax-exempt after five years of continuous service. Read in detail the rules of EPF withdrawal and taxability thereof.
Expenses Allowed to be Deducted from Certain Income Sources
Similar to freelancers and businesses who can deduct certain expenses from their income, a taxpayer earning income from other sources can claim deductions for expenses as given below:
- Expenses (not capital expenses) such as repairs, insurance premium, and depreciation in respect of plant, machinery, furniture and buildings are deductible from rental income earned by letting out of plant, machinery, furniture and building.
- The rental income from the plant and machinery is chargeable to tax under income from other sources. The expenses incurred in respect of such plant and machinery are allowed to be deducted.
- A standard deduction is allowed on family pension, i.e. a deduction which is the lower of Rs.15,000 and one-third of such income is available in case of income in the nature of family pension which is paid monthly to the family members of a deceased employee.
- In case, interest on compensation or enhanced compensation is received, 50% of the interest is allowed to be deducted (applicable starting from the assessment year 2010-11).
- As per Section 57(iii), a deduction is allowed for any other expense (which is not a capital expense) which has been spent wholly and exclusively for making or earning such income.