Updated on: Sep 21st, 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 on the same. Banks, post offices, and even Non-Banking Financial Companies (NBFCs) offer these deposit schemes.
However, while fixed deposits can give you guaranteed returns, there is a tax applicable on FD interest that you should know about. This tax on FD interest varies from person to person as it is dependent on your IT slab. Moreover, there is also a 10% TDS deduction from your interest income if it exceeds Rs.40,000 for the entire financial year.
Don’t be scared, 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 stay unaware of.
So, you need to build an understanding of tax on FD Interest to help you plan your taxes effectively. Let’s understand how the tax on FD is calculated and charged on your taxable income.
A fixed deposit scheme is a type of debt instrument that promises a guaranteed rate of return on your investment. Under the scheme, you have to invest a lump sum amount of money while opening the deposit account.
You have the flexibility to choose the term for which you will stay invested, ranging from a week to a decade. The financial institution, then, offers a fixed rate of return on your deposit over the chosen term. Each financial institution’s rate of return differs, with NBFCs generally offering higher returns than banks.
After the tenure comes to an end 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.
The interest that you earn from a fixed deposit account is liable 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.
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:
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 would have to submit Form 15G (or Form 15H for senior citizens) to the financial institution.
To calculate your FD interest taxation on the fixed deposit interest income, you should follow the below-mentioned steps:
As a smart investor, you should not wait until the maturity of your FD to report your interest income. This is because the TDS is deducted when the interest is credited and 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 which will increase your tax liability.
If you are looking to save tax on fixed deposits, here are some tips that you can use:
Senior citizens enjoy an upper hand when it comes to interest from fixed deposits. Here’s how:
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?
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.