Savings, FDs, Bonds: Each Is Taxed Differently

A Rs. 5 lakh FD at 7% generates Rs. 35,000 of interest. Most filers assume that is tax-free. It is not. It is slab-rate taxable. Bank TDS kicks in above Rs. 40,000. And you still have to report it in ITR even if TDS was deducted, because TDS at 10% rarely matches your marginal slab. This single category is the most common reason first-filers get section 143(1) intimations. The AIS feed reports every rupee of interest, your ITR needs to match.

By the end, you will know the tax treatment of every flavour of interest. SB account, FD, RD, bonds, post-office, EPF, NRE. And the deductions (80TTA, 80TTB) that soften it.

How different interest streams are taxed

Savings bank interest. Slab rate, but first Rs. 10k deductible under 80TTA (Rs. 50k under 80TTB for seniors). Old regime only.
FD / RD interest. Slab rate, TDS at 10% above Rs. 40k (Rs. 50k for seniors) per bank PAN per year. No 80TTA deduction.
Post-office small savings (NSC, KVP, POMIS). Slab rate. NSC interest is auto-reinvested for first 5 years and counts toward 80C (not 6th year).
EPF interest post-withdrawal. Exempt if 5+ years continuous, otherwise taxable as other sources.
Tax-free bonds (PFC, REC, NTPC, HUDCO). Fully exempt. Issued before 2016; secondary market buys still qualify.
NRE account interest. Fully exempt for NRIs under section 10(4)(ii). NRO interest is fully taxable with 30% TDS.
Senior Citizen Savings Scheme (SCSS). Slab rate; eligible for 80TTB.

Section 80TTA vs 80TTB. The deduction split

Section 80TTA (introduced 2012) allows Rs. 10,000 deduction on SAVINGS account interest for individuals and HUFs under 60. Section 80TTB (introduced 2018) allows Rs. 50,000 deduction on BOTH savings AND FD/RD interest for resident seniors (60+). A senior cannot claim 80TTA on top of 80TTB. They are mutually exclusive. Both live only in the old regime; the new regime disallows both.

For a senior with Rs. 80k of combined FD + savings interest: claim Rs. 50k under 80TTB, pay tax at slab on the remaining Rs. 30k. For a non-senior with Rs. 15k savings interest: claim Rs. 10k under 80TTA, pay slab on Rs. 5k. The 80TTA deduction does NOT extend to FD/RD interest. A common mistake.

Cumulative FD interest is taxable yearly, not at maturity

Even if a cumulative FD pays at maturity (say 5 years hence), interest accrues and is taxable every year under "accrual method" (mercantile accounting). AIS reports it yearly. Not reporting because "I have not received the money" is the fastest route to a notice. Keep a simple spreadsheet tracking FD accrual each financial year.

TDS suppression via Form 15G / 15H

If your total income is below the taxable limit, file Form 15G (below 60) or 15H (60 and above) with the bank to stop 10% TDS on FD interest. Must be refiled every financial year, with every bank, for every FD. The forms are bank- and PAN-specific. A 15G/15H submitted in April stays valid till March of that financial year. If your income later exceeds the taxable limit, you owe the TDS shortfall at filing plus 234B interest.

Cumulative FD. Accrual basis taxation

Cumulative FD pays interest only at maturity, but the interest accrues every year and is taxable every year. AIS reports it yearly. Under-reporting is the #1 reason for section 143(1) intimations on first-filers.

Form 15G / 15H to stop TDS

Total income below taxable limit to file 15G (< 60) or 15H (60+) with the bank to stop 10% TDS. Must refile every financial year per bank per PAN. Submitting false 15G/15H is an offence under section 277.

NRO vs NRE taxation for NRIs

NRE account interest (on repatriable earnings from abroad) is fully exempt under section 10(4)(ii). NRO account interest (on India-source income) is fully taxable with 30% TDS under section 195. The account type matters more than the bank or the currency. An NRI earning India rent credits NRO, pays full tax; an NRI parking US salary credits NRE, zero tax.

Key Takeaways

All interest (except tax-free bonds and NRE account) is taxable at slab.
80TTA: Rs. 10k on savings interest (non-seniors, old regime).
80TTB: Rs. 50k on savings + FD interest for seniors (old regime).
Cumulative FD to accrual basis taxation, not maturity basis.
Form 15G/15H stops TDS only if your income is truly below taxable; false submission is an offence.