Interest and discount income are common forms of investment earnings in India. Whether you hold fixed deposits, bonds, sovereign gold bonds (SGBs), or treasury bills (T-Bills), you may earn either:
- Interest Income: Paid periodically (FD interest, bond coupon, SGB 2.5% interest).
- Discount Income: Earned when securities are issued at a discount and redeemed at face value (T-Bills, Commercial Papers).
But how are these incomes taxed under the Income Tax Act in 2025? Let’s break it down.
Taxation of Interest Income
- Interest income is taxable under Income from Other Sources.
- Taxed at the individual’s slab rate (5%, 20%, 30%).
- No special concessional rate (unlike equity LTCG).
Examples:
- Fixed Deposit (FD): If you earn ₹50,000 as FD interest → added to your taxable income.
- SGB Interest (2.5% yearly): Taxable as income, added to your slab.
- Bond Coupon: Semi-annual coupon taxed at slab rate.
TDS Rule:
- Banks deduct 10% TDS if FD interest > ₹40,000 (₹50,000 for senior citizens).
- You must adjust final tax liability in ITR.
Taxation of Discount Income
Discount income arises when securities are issued below face value and redeemed at par.
Example:
- A 91-day T-Bill with face value ₹100 issued at ₹97.
- Investor pays ₹97, receives ₹100 → ₹3 is discount income.
Tax treatment:
- Considered interest income under “Other Sources.”
- Taxed at slab rate.
- No indexation or capital gains treatment (since it’s not a transfer but redemption).
Special Cases
A. Sovereign Gold Bonds (SGBs)
- Interest (2.5% yearly): Taxable at slab rate.
- Redemption after 8 years: Tax-free (capital gains exempt).
B. Government Securities (G-Secs) & Bonds
- Coupon interest → taxed at slab rate.
- Discounts on issue (e.g., zero-coupon bonds) → treated as accrued income taxable each year or at redemption (depending on RBI/IT rules).
C. Commercial Papers (CPs)
- Issued at discount → redemption difference = discount income, taxed at slab rate.
Tax Table Snapshot
| Instrument | Income Type | Tax Treatment |
|---|---|---|
| Fixed Deposit (FD) | Interest | Taxed at slab rate; TDS if > ₹40k |
| SGB Interest | Interest | Taxable at slab; No TDS |
| SGB Redemption | Capital Gains | Exempt if held till maturity |
| Treasury Bills | Discount Income | Taxed at slab rate |
| Commercial Papers | Discount Income | Taxed at slab rate |
Pros & Cons of Interest/Discount Income
Pros
- Safe and predictable income.
- Government-backed (T-Bills, G-Secs, SGBs).
- Ideal for conservative investors.
Cons
- Fully taxable at slab rate (no concessional treatment).
- Lower post-tax returns for high-income investors.
- No inflation indexation benefit (unlike some bonds).
Interest and discount income provide safety and steady returns, but come with the trade-off of full taxation at slab rates.
- Best for: Conservative investors, retirees, or those who prefer stability.
- Not ideal for: High-income individuals seeking tax efficiency.
Always declare interest and discount income in your ITR to avoid penalties.
Maximize Your Post-Tax Returns
Compare tax treatment of different assets — or check our detailed guides on SGBs, Bonds, and FDs.
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