Summary of this article
While reporting interest income, taxpayers should disclose the gross amount of interest earned during the financial year, irrespective of whether tax has been deducted at source.
Complete interest amount should be reported and TDS deducted can be claimed as credit while calculating the final tax liability.
Resident taxpayers should also remember that interest earned from foreign bank accounts is taxable in India and must be disclosed in the return.
Taxpayers frequently claim their salary and other significant income while filing their income tax returns (ITRs). However, what they ignore is the interest income earned by them. This is one of the most common mistakes made while filing tax returns. Interest earned from savings accounts, fixed deposits, recurring deposits, post office deposits, or even an income tax refund is taxable and must be disclosed in the ITR.
Since banks, post offices and other financial institutions report these details directly to the Income Tax Department, any mismatch between the income reported in the return and the information available in the Annual Information Statement (AIS) or Form 26AS may lead to notices or requests for clarification.
“Before filing the ITR, taxpayers should first collect all the documents relating to interest income, such as bank statements, interest certificates, fixed deposit statements and post office deposit records. They should also carefully review the interest income reflected in their AIS and Form 26AS, and reconcile these figures with their own records. If there is any discrepancy, it should be resolved before the return is filed to avoid any future notices,” says Harsh Rustagi, Consultant, Nangia & Co LLP.
While reporting interest income, taxpayers should disclose the gross amount of interest earned during the financial year, irrespective of whether tax has been deducted at source. A common misconception is that if TDS has already been deducted by the bank, there is no need to report the income in the ITR. This is incorrect. The complete interest amount should be reported, and the TDS deducted can be claimed as a credit while calculating the final tax liability.
Interest income is mostly clubbed under the head "Income from Other Sources" in the relevant ITR. This includes interest earned from savings bank accounts, fixed deposits, recurring deposits, post office deposits, income tax refunds and any other taxable interest receipts. Resident taxpayers should also remember that interest earned from foreign bank accounts is taxable in India and must be disclosed on the return.
“Taxpayers opting for the Old Tax Regime may also be eligible to claim deductions on certain types of interest income. Interest earned from savings bank accounts may qualify for deduction under Section 80TTA, while senior citizens may claim deduction under Section 80TTB, subject to the prescribed conditions and limits. However, taxpayers who have opted for the New Tax Regime cannot claim deductions under either of these provisions. As a result, the entire interest income becomes taxable at the applicable slab rates under the new regime,” says Rustagi.
Several common mistakes can result in incorrect reporting of interest income. One of the most frequent errors is claiming a deduction under Section 80TTA for interest earned on fixed deposits or recurring deposits. This deduction is available only for interest earned from savings bank accounts and not for FD or RD interest.
“Another common mistake is filing the ITR without reconciling the interest income reflected in the AIS and Form 26AS, which can lead to mismatches and possible scrutiny by the tax authorities. Taxpayers should also keep in mind the clubbing provisions under the income-tax law, under which interest earned by a minor child or, in certain cases, a spouse may have to be included in the taxpayer's own income,” informs Rustagi.
