Giving the right effect to tax deducted at source
There is usually some interest income that is earned by an individual during the year. Now interest earned on savings bank accounts upto Rs 10,000 a year will be allowed as a deduction but there is no such benefit as far as interest on fixed deposits or interest on other bonds and debentures are concerned. Showing the right amount of income earned in the tax return is essential, but often there is an element of confusion that arises due to some additional elements like tax deducted at source. Here is a simple way in which all such situations can be tackled.
The overall approach when it comes to the taxation of income from interest is that this will be classified under the head of Income from other sources. The other important point is that the gross amount of interest will be taxed in the hands of the individual so it is vital that the gross figure is understood to come to the correct amount of income that is earned. The gross interest is the total interest earned before any tax deduction or some other reduction that might be undertaken before the amount is paid. The first step will involve checking whether a particular receipt is a gross receipt or a net receipt and then dealing with the situation.
Income with tax deducted at source
One of the most common situations that an individual will face is that there is some interest that is earned during the year but there is also some tax deduction at source that is witnessed on this income. The final figure that is received is actually the net income figure because this is received after the tax has been deducted. In such a situation there will have to be some work to arrive at the gross income earned and then the tax deducted has to be taken separately and accounted along with the other taxes paid.
Take for example a situation where there is a deposit of Rs 4 lakh that is present with a bank and the interest rate on this is 9 per cent for the investor. There will be a tax deduction of 10 per cent by the bank since the income exceeds the TDS threshold of Rs 10,000. At the end of the day the income earned is Rs 36,000 but there is a TDS of Rs 3,600 so the final amount received is Rs 32,400. Many people just take this figure as their income for the year. However that is not the case as the actual amount of income that has to be considered for tax purposes is the gross figure of Rs 36,000.
As far as the TDS is concerned this will have to be accounted separately along with the other TDS so this will provide some element of relief in terms of the total tax liability. Just because this TDS is done it does not mean that the tax liability is over as the individual could fall into a higher tax bracket then the rate at which the TDS is done so the balance amount of tax will have to be paid by the individual on their own.
Tax free interest
There are times when there is a tax free interest that is received by the individual from various bonds that pay out this interest usually on an annual basis. The receipt of this figure will require a different dealing of the whole situation. First of all there is no question of a gross or net figure as there is only one earning that is available. Second this is tax free income so it is actually not taxable at all and hence will not enter the tax return workings at all but has to be shown separately as part of all the tax free income earned during the year.
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