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India Investment Income Guide

Investment income in India is primarily taxed under the heads "Income from Other Sources" (dividends, interest) or "Capital Gains" (sale of investments). The Dividend Distribution Tax (DDT) was abolished from 1 April 2020 — dividends are now taxed in the hands of the recipient. TDS on dividends is 10% for residents. TDS on interest from bank deposits and fixed deposits is 10-20% depending on the type and amount. Taxpayers can claim deductions under section 80C (up to INR 1.5 lakh) for investments in specified instruments.

Dividend Taxation

  • DDT abolished (from 1 April 2020): Companies no longer pay Dividend Distribution Tax. Dividends are now tax-free in the hands of the recipient for the company paying DDT — wait, DDT was abolished. Dividends are taxable in the hands of the shareholder at their applicable slab rate.
  • TDS on dividends (section 194): The company deducts TDS at 10% on dividends paid to resident individuals if the total dividend exceeds INR 5,000 in a financial year. No TDS if the recipient submits Form 15G/15H.
  • Dividends from mutual funds: Dividends from equity-oriented mutual funds and debt mutual funds are taxed in the hands of the unitholder at the slab rate. TDS at 10% applies if the dividend exceeds INR 5,000.

Interest Taxation

  • Savings bank account interest: Up to INR 10,000 is deductible under section 80TTA (for individuals and HUFs). For senior citizens, the deduction under section 80TTB is up to INR 50,000 (covering savings, fixed deposits, and recurring deposits).
  • Fixed deposit (FD) interest: Fully taxable at the slab rate. TDS at 10% is deducted by the bank if the total interest exceeds INR 40,000 (INR 50,000 for senior citizens). If PAN is not provided, TDS is 20%.
  • Post office deposits: Interest on post office savings account (up to INR 10,000 under section 80TTA), time deposits, and NSC are taxable. The 5-year post office time deposit qualifies for section 80C deduction.
  • Tax-free bonds: Interest from certain infrastructure bonds and tax-free bonds issued by government entities is exempt from income tax. These are rare post-2016.

Section 80C Deductions

Section 80C allows a deduction of up to INR 1.5 lakh for specified investments and expenses:

  • Employee Provident Fund (EPF): Employee contributions to EPF are deductible. The employer contribution is not deductible for the employee but is a perquisite in some cases.
  • Public Provident Fund (PPF): Contributions up to INR 1.5 lakh per year are deductible. PPF has a 15-year lock-in and offers tax-free interest and maturity.
  • Equity-Linked Savings Scheme (ELSS): Mutual fund investments with a 3-year lock-in. ELSS offers the shortest lock-in among 80C instruments and potential capital gains.
  • National Savings Certificate (NSC): Post office instrument with a 5-year maturity. The interest accrued is also eligible for deduction under 80C (reinvested interest).
  • Life insurance premiums: Premiums paid for life insurance policies (up to 10% of the sum assured) are deductible. Unit-Linked Insurance Plans (ULIPs) also qualify.
  • Home loan principal repayment: The principal component of home loan EMIs is deductible under 80C.

Other Deductions (80D, 80E, 80G)

  • Section 80D (Health insurance): Deduction of up to INR 25,000 for health insurance premiums (INR 50,000 for senior citizens). An additional INR 5,000 for preventive health check-ups.
  • Section 80E (Education loan): Full deduction for interest paid on education loans for higher studies (no upper limit). Available for 8 years from the year of first repayment.
  • Section 80G (Donations): Donations to specified charitable funds are deductible at 50% or 100% of the donated amount, subject to a ceiling of 10% of the gross total income.

FAQs

Are dividends from Indian companies tax-free?

No. Since DDT was abolished from 1 April 2020, dividends received from Indian companies are taxable in the hands of the shareholder at their applicable income tax slab rate. The company deducts TDS at 10% before paying the dividend (if the dividend exceeds INR 5,000).

How is interest from a tax-saving FD taxed?

Interest on a tax-saving fixed deposit (5-year lock-in under section 80C) is fully taxable in the year it accrues, even though it is not paid out until maturity. The bank may deduct TDS on the accrued interest each year.

Can I claim 80C and invest in the new tax regime?

No. Under the new tax regime (default from FY 2023-24), most deductions including 80C, 80D, and HRA exemption are not available. You must opt for the old tax regime to claim these deductions. Compare your tax liability under both regimes before choosing.