Every earning individual in the country has to pay income tax if they fall under the tax bracket. While the thought of a tax-free income and a tax-free interest income is incredible, in reality, it is not easy to save on taxes. This is because many people may not have a sound understanding of taxes. The rate of financial literacy in India is slightly over a quarter, meaning that more than 70% of the general population is not financially literate. These figures are even lower when it comes to the people who understand the basics of money management, with that number being under 20%.
Income tax is also a significant source of revenue for the government. It enables them to invest in welfare projects and subsidy schemes, among other projects and domains. However, to encourage people to pay taxes, the government also provides several exemptions for individuals and encourages them to invest that amount.
The most popular savings instruments in India are savings accounts and fixed deposits. While the former is a regular bank account and earns modest interest over time, the latter is a term deposit with a lump sum put away for a fixed tenure, earning stable interest. However, interest income earned from these sources is taxable after a limit. Thus, it becomes important to understand tax-exempt definition, tax-exempt interest, and how to generate tax-free interest income to maximise savings and reduce the tax burden.
What is tax-exempt interest?
Tax-exempt interest refers to the portion of interest income that is not included in your total taxable income. The Income Tax Act lays down specific provisions under which certain types of interest are exempt from tax. Since this income is excluded from gross total income, it is not subject to taxation
If such exemptions were not provided, interest earned on all eligible instruments or investments would normally be taxable. Section 10 of the Income Tax Act specifically lists the cases where interest income qualifies for exemption.
It is important to understand that not all types of interest income are tax-free under Indian tax laws.
Who is eligible for tax-exempt interest?
Individuals or entities covered under Section 10 of the Income Tax Act are eligible for exemption on specific types of interest income. Generally, interest, premium, or redemption amounts from government-issued securities, certificates, or deposits with the government are exempt from income tax.
For non-residents, tax-exempt interest includes:
- Interest earned on government-notified securities and bonds (as published in the official gazette), including premiums on redemption.
- Interest credited to a Non-Resident (External) [NRE] account in any bank.
- Interest on savings certificates issued before 1 June 2002.
Importance of tax-free interest income
- Tax-free interest income is earnings from investments that are not taxed.
- Such income helps you save money and reduce your tax liability.
- The Income Tax Act, 1961, defines which interest income is exempt from tax.
- Savings account interest is taxable if it exceeds Rs. 10,000 per year.
- For senior citizens, the tax exemption limit on savings account interest is Rs. 50,000 per year.
- Fixed deposits (FDs) are secure and reliable investment options.
- FD interest is taxable if it exceeds Rs. 40,000 per year.
Therefore, interest from savings accounts and FDs is not completely tax-free.
Nonetheless, fixed deposits remain popular among Indian citizens. Bajaj Finance FD is a secure way to invest your hard-earned money, with interest rates up to 7.30% p.a. This comes with the highest ICRA (AAA/Stable) and CRISIL (AAA/STABLE) ratings, ensuring your deposits remain secure. You can book the FD by visiting the Bajaj Finserv website or downloading the Bajaj Finserv App.
Sources of tax-free interest income
Income tax comes into the picture for all your earnings. Earning interest on your wealth over time is a great way to generate returns. However, these returns are also largely taxable. Let us now understand a few sources of tax-free interest income for Indian citizens and residents. These schemes and provisions are important to know as they help you plan your finances better and achieve financial freedom.
In the Income Tax Act, Section 10 outlines cases where interest income you generate will be exempted from income tax. Some of the major provisions are:
- Section 10 (11) - Interest earned in Statutory Provident Fund
- Section 10 (12) - Interest earned in a Recognised Provident Fund, up to 9.5% per year
- Section 10 (11A) - Interest earned in accounts opened under the Sukanya Samriddhi Account
- Section 10 (26) - Interest income earned on securities by certain specific groups of Scheduled Tribes residing in specified areas (like Ladakh, Manipur, Arunachal Pradesh, Nagaland, among others).
If you are looking for safe investment option, then you can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 7.30% p.a.
Conclusion
Understanding the concept of tax-exempt interest is important for anyone aiming to optimise their financial planning and lower their tax liabilities. This knowledge is especially valuable in a country where financial literacy is relatively low. While paying income tax is necessary for government revenue, individuals can legally explore sources of tax-free interest income to reduce their tax burden. Key provisions in the Income Tax Act, such as Section 10, provide exemptions on various types of interest income, including savings accounts and certain investment schemes. By making the most of these exemptions, you can boost your savings, lower your taxes, and move closer to your financial goals.
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