Interest income is the consideration that Banks or Financial Institutions pay to the people who maintain their deposits with them. It is the amount earned by keeping one’s deposits with Banks, Post Offices , etc.
Factors affecting Interest Income
The interest that one will earn is predetermined while entering into the contract. It should be noted that unless specifically exempted, the interest income one earns is liable to be taxable. The percentage of the principal that one will earn as income varies from institutions to institutions and also varies on the term for which the deposit will be maintained with that institution.
Tax Impact
From the tax consideration one may note that the amount of money that one has earned out of maintaining deposits are added to his other incomes like salary, profit, etc. The rate at which tax will be deducted depends on which slab the total taxable income falls. It may be nil, 10%, 20% and even 30%. They are also exposed to related charges like education cess, etc.
So while investing, one must consider the tax-ability part of the interest income that one is expected to earn. For example, if one gets 10% rate of interest and his taxable income falls under 30% slab, effectively in the end he is getting 7% return. But the default risk or credit risk is minimum in these type of investments.
