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Interest refers to interest income from various deposits. Interest income varies by the risk and the duration of an investment.
As per Indian Income Tax rules, interest income is added to your overall income and is subject to income tax. Interest income is included in the head 'income from other sources.'
Your annual income is ₹10,00,000, and you get interest of ₹1,00,000 from savings in fixed deposits. For tax purposes, you will have to add this ₹1,00,000 to your income and thus your taxable income will be ₹11,00,000.
Let's look at some common ways of earning interest income in India.
Savings accounts: You can earn interest through your savings in bank accounts. The advantage of savings accounts is the flexibility to withdraw money at all times.
Example 1: Banks such as Punjab National Bank, Bank of Baroda, Citibank, Indian bank, etc. offer interest of 4% per annum on savings accounts.
Bank deposits: These are amounts invested in banks for fixed terms ranging from 7 days to 10 years. Interest rates vary by the term of the investment. Bank deposits offer a higher rate of interest as opposed to savings accounts. Note, that to qualify for the higher rate of interest, you cannot withdraw money from these deposits until the completion of the term.
Example 2: ICICI Bank offers different rates for different fixed deposits. For deposits maturing between 7 and 14 days, the bank offers an interest of 4.5% for general citizens and 5.0% for senior citizens. For deposits over 5 years, the interest rate is 8.5% for general and 9.25% for senior citizens.
Post office deposit: Post office deposits can be in the form of savings accounts, term deposits, monthly income schemes, and senior citizen schemes. Interest rates vary by schemes. For example, post office savings account offers an interest of 4.0% per year, and a 5-year post office deposit offers an interest of 8.4% per annum.
Public Provident Funds (PPFs): PPFs are an investment option for a long term of 15 years. The Government of India backs PPFs, and so they are a very dependable choice. The deposit amount per year can be as low as ₹500. PPFs offer interest at a rate of 8.7%. The best part about PPFs is that the interest is entirely tax-free. You can open a PPF account with any of the leading banks.
Company Deposits: Company deposits refer to deposits made in a company for a fixed term. Interest rates on company deposits are higher, because company deposits are a more risky option as compared to other deposits.
Example 3: Shriram Transport Finance's company deposits offer interest rates of between 8.88% and 10.75% per annum. Investment term can be between 1 and 5 years.
The options mentioned above are some ways of earning interest. Other options such as co-operative credit societies, National Savings Certificate (NSC), bonds, Government of India (GoI) bonds, etc., can also be a source of interest income.
Except for a few investments like PPF or NSC, which provide tax-free interest, interest from all other sources will increase your taxable income. Use our tax calculator to see how interest affects your tax payable.