Income from Other Sources – Detailed Guide

As per Section 56 of the Income Tax Act, income that cannot be taxed under the heads:

Salary

House Property

Profits and Gains of Business or Profession

Capital Gains

is taxed under the head "Income from Other Sources."

Income from Other Sources is a residual category under the Income Tax Act, 1961. Any income that does not fall under other specific heads of income like salary, house property, business/profession, or capital gains is taxed under this head. It ensures that every source of income is taxed, even if it doesn’t fit neatly into other categories.

Let’s break down what qualifies as income from other sources, its tax treatment, exclusions, and how it’s reported for tax filing.

Heads of Income Under the Income Tax Act

According to the Income Tax Act, all earnings are grouped into five key categories to ensure accurate calculation and reporting of taxes. Properly classifying your income under the correct head is essential for correct tax assessment. Here’s a quick overview of each category:

Salary Income

Covers all payments received from an employer, such as basic pay, allowances, bonuses, commissions, and perks.

Income from House Property

Includes rental income from owned residential or commercial property, as well as notional rent on self-occupied houses (as per tax rules).

Profits from Business or Profession

Applies to income earned through business activities or professional services—this could include earnings from freelancing, consultancy, or trade.

Capital Gains

Relates to profits or losses from the sale of capital assets like land, buildings, shares, mutual funds, or other investments.

Other Sources

Covers all other types of income not falling under the above heads. This might include bank interest, dividends, gifts, winnings from lotteries, or any miscellaneous earnings.

Interest Income from Savings Bank Accounts

Any interest earned from your savings bank account needs to be reported under the head "Income from Other Sources" when filing your income tax return. Unlike fixed deposits and recurring deposits, where the bank deducts TDS (Tax Deducted at Source), savings account interest is not subject to TDS.

While interest from fixed and recurring deposits is fully taxable, interest earned from savings accounts and certain post office deposits is eligible for deduction up to a specified limit. Despite the partial deduction, all such interest income—whether from savings accounts, fixed deposits, or post office savings—is declared under the same income category.

Section 80TTA – Deduction on Savings Account Interest

Under Section 80TTA of the Income Tax Act, individuals and Hindu Undivided Families (HUFs) can claim a deduction on interest earned from savings accounts maintained with a bank, cooperative bank, or post office.

A maximum deduction of ₹10,000 per financial year is allowed under this section. If the total interest earned exceeds ₹10,000, the excess amount is treated as taxable income under the head ‘Income from Other Sources’.

Please note, this deduction is not applicable to interest earned from fixed deposits, recurring deposits, or other time-bound deposits.

Taxation on Fixed Deposit Interest

The interest earned from fixed deposits is treated as income under the head ‘Income from Other Sources’ and is taxed according to the individual’s applicable income tax slab.

Banks and financial institutions deduct Tax Deducted at Source (TDS) on FD interest if it exceeds ₹5,000 in a financial year for regular individuals, and ₹40,000 for senior citizens. However, senior citizens can claim a deduction of up to ₹50,000 per year on interest income from bank and post office deposits under Section 80TTB of the Income Tax Act.

It’s important to understand that TDS is applicable on the total interest earned across all fixed deposits held with a particular bank during the financial year. Even if the interest earned is below the TDS limit, the amount still needs to be reported when filing your income tax return.

How to Avoid TDS on Fixed Deposit Interest

While banks are legally required to deduct TDS (Tax Deducted at Source) when your interest earnings from fixed deposits cross a certain limit, there are legal and smart ways to reduce or avoid this deduction. Below are some effective strategies:

Submit Form 15G/15H

If your total annual income is below the basic exemption limit, you can prevent TDS deduction by submitting a self-declaration form:

Form 15G: For individuals below 60 years of age

Form 15H: For senior citizens (60 years and above)
Once submitted to the bank, TDS won’t be deducted on your FD interest.

Spread Your FDs Across Multiple Banks

TDS is calculated individually by each bank. By distributing your fixed deposits across different banks, you may keep the interest earned from each bank below the TDS limit—₹5,000 for regular individuals and ₹40,000 for senior citizens.

Choose Cumulative Fixed Deposits

Cumulative FDs reinvest the interest rather than paying it out regularly. Since interest is received only at maturity, TDS may be deferred until that time, giving you more control over your tax timing.

Consider Tax-Free Bonds

Invest in tax-free bonds issued by certain government-backed organizations. The interest earned on these bonds is completely exempt from income tax and does not attract TDS.

Invest in Tax-Saving FDs

Some banks offer 5-year tax-saving fixed deposits that qualify for deduction under Section 80C of the Income Tax Act (up to ₹1.5 lakh). While interest earned is still taxable, some banks do not deduct TDS unless your interest exceeds the threshold.

Time Your Interest Payouts Strategically

If you hold multiple FDs, consider scheduling their maturity or interest payouts across different financial years. This can help you stay under the annual TDS limit each year.