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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Taxation of Debt Products

Under the Income-tax Act as applicable to FY 2024-25, which of the following statements about interest on a bank fixed deposit held by a resident individual is correct?

FD interest of a resident individual who is not in business is taxed under Income from Other Sources at slab rates. It is taxed on receipt or accrual depending on the method of accounting followed. It is not treated as capital gains and has no blanket Rs 1,00,000 exemption.

  1. AInterest is taxed on accrual basis or receipt basis at the assessee's option, and is taxed under the head Income from Other Sources for an individual not carrying on a businessCorrect
  2. BInterest is exempt from tax up to Rs 1,00,000 per year for all individuals
  3. CInterest is taxed as capital gains on maturity
  4. DInterest is taxed only in the year the deposit is withdrawn, regardless of the accounting method

Explanation

For an individual not carrying on business, FD interest is taxed as Income from Other Sources at slab rates. Individuals who follow the cash system are taxed on receipt, while those on the mercantile system are taxed on accrual. Interest is not capital gains and has no blanket Rs 1,00,000 exemption.

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