Interest Income — Bank Interest, Interest on Securities & Compensation Interest

Relevant Provision: Section 92(2)(e) and (i)

1. Charging Provisions

Section 92(2)(e) covers interest on securities not chargeable under Business/Profession. Section 92(2)(i) covers interest received on compensation or enhanced compensation for compulsory acquisition of property. Ordinary bank/FD/RD/post-office interest, though not separately enumerated, falls under the general residuary charge of Section 92(1).

2. Taxability and Point of Taxation

Interest income is generally taxed on accrual or receipt basis, depending on the assessee's regular method of accounting. For cumulative FDs, banks report accrued interest annually even though the amount isn't received until maturity — a frequent source of confusion.

Interest received on enhanced compensation for compulsorily acquired land is taxed only to the extent of 50% — a flat 50% deduction is allowed with no further deduction permitted against this specific income, and it is taxed in the year of receipt, not accrual.

3. Exemptions and Deductions

Interest on PPF and Sukanya Samriddhi Yojana remains exempt under the specific exemption schedule. Interest credited to an NRE account is generally exempt (subject to FEMA/RBI conditions), whereas NRO account interest is fully taxable in India.

Section 80TTA (or its 2025-Act equivalent) allows a deduction up to ₹10,000 on savings bank interest for individuals/HUFs (non-senior citizens), under the old tax regime only. Section 80TTB allows a deduction up to ₹50,000 for senior citizens on all interest income from banks/post offices/co-operative banks, under the old tax regime only. Under the default new tax regime, these deductions are generally not available.

4. Illustrative Example

Mr. Singh (age 45) earns ₹18,000 savings bank interest and ₹60,000 FD interest during the year, and opts for the old tax regime. His total interest income of ₹78,000 is taxable under Other Sources; he can claim a Section 80TTA deduction of ₹10,000 (capped, though his savings interest alone was ₹18,000) — leaving ₹68,000 as net taxable interest income after this specific deduction. If he were a senior citizen instead, he could claim up to ₹50,000 under Section 80TTB against the combined interest, leaving only ₹28,000 taxable.

5. Case Laws

CIT v. Ghanshyam (HUF) (2009) SC — held that interest on enhanced compensation is a distinct species of income, taxable in the year of receipt under Income from Other Sources.

Bikram Singh v. Land Acquisition Collector (1997) SC — affirmed that interest on delayed compensation is a revenue receipt taxable as income, not a capital receipt.

CIT v. Govindbhai Mamaiya (2014) SC — clarified apportionment of interest income on compensation among co-owners according to their respective shares.

6. Precautions

Report accrued interest on cumulative deposits every year, not just at maturity, to avoid a large mismatch/notice in the maturity year.

Submit Form 15G/15H timely to avoid unnecessary TDS deduction, but remember this does not exempt the income — it only avoids upfront withholding.

Interest awarded on income-tax refunds is also taxable as Income from Other Sources and is often missed by taxpayers.

7. FAQs

Q1. Is savings bank interest fully tax-free up to ₹10,000?

No — it is fully taxable; only a deduction up to ₹10,000 (₹50,000 for senior citizens) is available under the old regime, and only if you opt for that regime.

Q2. Is interest on PPF or Sukanya Samriddhi Yojana taxable?

No, such interest remains exempt under the specific exemption schedule, as these are specified government-backed schemes.

Q3. How is interest on an income-tax refund taxed?

It is taxable as Income from Other Sources in the year of receipt, at the taxpayer's slab rate, separate from the refunded tax itself (which is not income).


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