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Tax On FD Interest

Updated on: 21 Dec 2023 | 9 min read

Fixed deposits are preferred by investors who want to invest a lump sum amount for a fixed time and seek guaranteed returns. Banks, post offices, and Non-Banking Financial Companies (NBFCs) offer these deposit schemes.

However, while fixed deposits can give you guaranteed returns, a tax applies to the interest received from FD investment. This tax on FD interest varies for every individual depending on their Income Tax slab. Additionally, a 10% TDS is also applicable on interest earned if it exceeds Rs.40,000 in one financial year.

 

However, FDs also offer an excellent opportunity for tax deduction under Section 80C of the Income Tax Act 1961. The taxation and tax exemptions on fixed deposits have many nuances that regular investors must be aware of.

So, you need to understand taxes on FD interest to help you plan your taxes efficiently. Let’s understand how the tax on FD is calculated and charged on your taxable income.

What is a Fixed Deposit?

A fixed deposit scheme is a type of investment instrument that promises a guaranteed rate of return on your investment. Under the scheme, you must invest a lump sum while opening the deposit account.

You can choose the term you want to stay invested in, ranging from a few days to a decade. The financial institution, then, offers a fixed rate of return, commonly known as interest, on your deposit over the chosen term. Each financial institution’s rate of return differs, with NBFCs and small finance banks generally offering higher returns than banks.

After the tenure ends and the deposit matures, you get a lump sum amount that includes the amount you deposited and the interest earned thereon.

While Fixed deposits do not allow premature withdrawals, you can opt for such withdrawals by paying a penalty fee to the financial institution. This penalty reduces the interest that you have earned.

How is Interest Income Taxed?

The interest that you earn from a fixed deposit account is subject to taxes. It is clubbed with your taxable income and is taxed at your income tax slab rates. For example, let’s assume you earn an interest of Rs.10,000 on your fixed deposit account and fall into the 30% tax slab. In this case, you would have to pay a tax of Rs. 3000 on the interest income that you have earned.

 

Further, if you have provided PAN details to the bank and your annual interest income from FD is more than Rs.40,000, then a TDS of 10% will be deducted. In case you have not provided the PAN details, the TDS will be charged at 20%. But TDS will not be applicable if the interest income is less than Rs.40,000 in a year.

If you are a senior citizen, i.e., aged 60 years or above, you can claim a deduction on the fixed deposit interest under Section 80TTB of the Income Tax Act, 1961. For this, the annual interest income from all the FDs should be less than Rs.50,000. So, for a senior citizen who is earning an interest income of Rs. 10,000, the tax on FD would not apply.

 

Let’s understand when and how TDS deduction is charged on the fixed deposit.

Understanding TDS concerning FDs

TDS stands for Tax Deducted at Source. It is the tax deducted by the financial institution before it pays the interest income to you. However, the TDS deduction is not universally applicable.

TDS is deducted only in the case of specific instances. A TDS is charged on your interest from a fixed deposit in the following instances:

  • If you are below 60 years old and the aggregate interest income from all your fixed deposit accounts is Rs.40,000 or more
  • If you are a senior citizen who is 60 years old or above and the aggregate interest income from all your fixed deposit accounts is Rs.50,000 or more

In either of these cases, the financial institution would deduct TDS at a specified rate from the interest income. This TDS would then be deposited with the government on your behalf. When you file your taxes, you can claim credit for the TDS already deducted.

The rate of TDS deduction is 10% if you have provided your PAN details to the financial institution. If you have not provided your PAN details, the TDS deduction rate would increase to 20%.

There is, however, one exception wherein TDS is not deducted by the bank even if your interest income is more than Rs. 40,000 (Rs.50,000 for senior citizens).

This is when your total taxable income is below Rs. 2.5 lakh. Since your income falls beneath the threshold limit for taxation, you have no tax liability. As such, TDS is not deducted from your FD interest. However, to claim this exemption, you must submit Form 15G (or Form 15H for senior citizens) to the financial institution.

How do you calculate the tax on interest income?

To calculate your FD interest taxation on the fixed deposit interest income, you should follow the below-mentioned steps:

  • Calculate the aggregate interest earned from all the fixed deposit accounts that you hold, in case you have multiple accounts.
  • If you are below 60 years of age, check your tax slab rate. Apply your tax slab rate to the interest income to find out the income tax on FD interest.
  • If you are a senior citizen, check if the interest income is below Rs. 50,000. If it is so, you can claim a deduction on the entire amount of the interest. By doing so, the income tax on your fixed deposit’s interest would become nil. However, if the amount is more than Rs. 50,000, you will have to pay tax on fixed deposit interest at your tax slab rate.
  • If your annual interest income is more than Rs.40,000 (Rs.50,000 for senior citizens), the financial institution would deduct a TDS. You can deduct this TDS from your calculated tax liability since this tax has already been paid on your behalf.
  • However, if you are not eligible for a TDS deduction, submit Form 15G or 15H to the financial institution.

As an intelligent investor, you should report your interest income before your FD matures. This is because the TDS is deducted when the interest is credited, not when the FD matures. So, if you have an FD for 3 years, banks will deduct TDS at the end of each year, and the accumulated interest may push you up to a higher slab, increasing your tax liability.

When do you pay tax on interest income?

If a tax obligation is associated with adding interest income to your overall income, it must be settled on or before the 31st of March in the financial year. This is the procedure for settling any due tax.

However, if the tax amount, including your interest income, exceeds Rs. 10,000, you must make Advance Tax payments. Consequently, complying with the rules for quarterly payment of advance tax in instalments is required.

How to Save Tax on Fixed Deposits?

If you are looking to save tax on fixed deposits, here are some tips that you can use:

  • Invest in a 5-year fixed deposit scheme offered by a bank or a post office. This would help you claim a deduction under Section 80C on the amount you invest. The deduction limit is Rs. 1.5 lakh. You can, thus, invest Rs. 1.5 lakhs in the 5-year fixed deposit scheme and reduce your tax liability by Rs. 45,000 if you are in the highest tax bracket of 30%.
  • Try and open a fixed deposit account in the name of a senior citizen, like your parents or grandparents. You would not only earn higher interest rates, but the interest income, up to Rs.50,000, would also be tax-free under Section 80TTB.
  • If your taxable income is below Rs.2.5 lakhs, submit Form 15G or 15H to the financial institution so that no TDS is deducted from your interest income.

Interest from FD for Senior Citizens

Senior citizens enjoy an upper hand when it comes to interest from fixed deposits. Here’s how:

  • They get a higher rate of interest.
  • Under Section 80TTB, FD interest taxability is not applicable if the interest income is up to Rs. 50,000.
  • No TDS is deducted if their aggregate interest income is up to Rs.50,000. The limit is higher compared to individuals below 60 years of age.
  • So, if you are a senior citizen, open a fixed deposit account and enjoy the additional benefits that it has to offer.

Final Thoughts

Fixed deposits are a good instrument if you are looking to save up for a fixed term and expect guaranteed returns. However, when investing in FDs, know the tax implication on the returns so that you can plan your taxes effectively.

Try to lower your tax liability for a higher disposable income. A higher disposable income, in turn, would help you save more for your financial goals. A win-win, isn’t it?

FAQs

Will I be able to get FD interest without TDS if my income is below the taxable limit?

Yes, if your income is below Rs. 2.5 lakhs/P.A, you can get the FD interest without a TDS deduction. However, you would have to submit Form 15G/H to the financial institution declaring the same so that it does not deduct TDS from your interest income.

When does a bank not deduct TDS on fixed deposits?

A bank does not deduct TDS on fixed deposits if the aggregate interest income is below Rs. 40,000 (Rs. 50,000 for senior citizens).
However, the bank would not deduct TDS even if your interest income is above the aforementioned limit, but your taxable income is below Rs. 2.5 lakhs. You would have to submit Form 15G/H to the bank so that TDS is not deducted.

When does a bank not deduct TDS on fixed deposits?

A bank does not deduct TDS on fixed deposits if the aggregate interest income is below Rs. 40,000 (Rs. 50,000 for senior citizens).
However, the bank would not deduct TDS even if your interest income is above the aforementioned limit, but your taxable income is below Rs. 2.5 lakhs. You would have to submit Form 15G/H to the bank so that TDS is not deducted.

How can I ensure zero TDS deduction on my FD by the bank?

Submit a filled and signed Form 15G/H to ensure a zero TDS deduction on your FD account. However, this would be applicable only if your taxable income is below Rs. 2.5 lakhs. If, however, your taxable income is more than Rs.2.5 lakhs, no TDS would be deducted if your aggregate FD income is below Rs.40,000 (Rs.50,000 for senior citizens). So, check which instance applies to you and use it to ensure zero TDS deduction on your FD by the bank.

Can I get FD interest without TDS if my income is below the taxable limit?

You can fill out Form 15G/H and get FD interest without paying TDS.

What is the TDS rate on FDs?

Interest income from Fixed Deposits (FDs) incurs a 10% TDS, but if you don't provide your PAN details to the bank, the TDS rate increases to 20%.

Can I claim any deduction for the interest income earned from fixed deposits?

No, you cannot claim any deduction for the interest earned from a fixed deposit.

In which cases am I liable to pay tax on FDs?

Starting from April 2019, if the interest earned on Fixed Deposits (FDs) exceeds ₹40,000, PAN users must pay a 10% tax, while non-PAN users would pay a 20% tax on the interest earned. 
This tax is deducted at source (TDS) when the annual interest is credited. However, please note the ₹40,000 limit applies to each FD, not to the total earnings from all FDs combined.

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