Many of us rely on interest income for our regular cash flows. A few can’t look beyond such investments.
However, are you aware how your interest income is taxed?
Taxation of Interest Income for various Investments
The tax treatment of interest income varies across investments. Clearly, a few investments receive favourable treatment as far as taxation of interest income is concerned.
For instance, interest income from PPF account and tax-free bonds is exempt from income tax while interest income from bank fixed deposits is taxed at your marginal rate of income tax (slab rate).
In this short post, let’s look at how interest income from select investments is exempt from tax while the interest income is taxable for other investments.
You can see some of the investments such as equity and debt funds and NPS do not offer interest income. Hence, the returns from investments are not taxed as interest income.
For equity and debt mutual funds, the returns are market linked and are taxed as capital gains.
NPS does not provide interest income either and provides market linked returns. The taxation of NPS proceeds is quite different.
To be honest, the earlier table shouldn’t have had equity and debt MFs and NPS in the first place. However, I thought it will be better to have such investments here.
What about TDS?
For Tax deduction at source, TDS is deducted only once the interest income per annum exceeds a certain threshold.
What should you do?
Even though a few investments enjoy favourable tax treatment, your investment decisions shouldn’t merely be driven by tax considerations alone. For instance, even though PPF offers good returns and tax-free interest, it is not a suitable investment if you need the money after 3 months.
In such a case, a fixed deposit will be better choice.
Keep your goals in mind too.
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I am not a tax expert. Therefore, you are advised to consult a Chartered Accountant.
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