Fixed Deposits are a popular investment tool. These enable you to grow your wealth exponentially in the
short and long run and ensure the safety of your hard-earned money. However, there is a crucial tax
component to the interest income earned from the FDs that investors often overlook.
You might be asking, is FD interest taxable? Well, the answer to this question is “Yes.” Since the FD
return rate is quite lucrative, you must thoroughly understand how a tax on the interest income
generated from FDs is calculated, when and how to pay the tax and how to open a Tax-Saving FD
Rates. Continue reading this article to learn about these in detail.
What is a Fixed Deposit?
Fixed Deposits, popularly known as FDs, are a top-rated investment tool that promotes financial stability.
FDs help you to invest a fixed amount of money at a pre-decided tenure and interest rate. Once matured,
you reap the advantages of a lump sum in addition to the interest accrued on the invested amount.
How is the Taxation of the Interest Income on the FD Done?
The answer to your query is that FD is interest taxable – the interest accrued on an FD is taxable as per
the appropriate tax rates set by the IT Act.
● If you are not a senior citizen and your interest income hits INR 40,000, or if you are a senior citizen
and your interest income is worth INR 50,000 in a particular financial year, the bank will deduct 10% TDS.
● If you are an NRI, you are subjected to 30% TDS plus cess and applicable surcharge.
Here, let’s consider an example.
You have two FD accounts with two different banks.
Bank A gives you an interest income of INR 60,000 p.a.
Bank B gives you an interest amount of INR 10,000 p.a.
In such a case, a 10% tax will be deducted only by Bank A, as the interest amount is higher than the limit.
How to Calculate Tax on Interest Income?
You can determine the tax on your FD income by following the following steps:
Step 1: Under the heading “Income from Other Sources”, add up your total FD interest.
Step 2: Now, add your remaining income under specific heads of income.
Step 3: Deduct the exemptions, deductions and tax allowances.
Step 4: Now, you can calculate your tax on total income by your applicable tax slab
What is TDS?
When you receive a payment, the entity or individual making the payment makes sure to withhold a
certain tax amount before making the payment. The tax thus withheld is known as Tax Deducted at
Source or TDS.
For example, you were supposed to be paid INR 3,000. However, 15% tax was deducted, which amounts
to INR 450. Thus, now you receive INR 2,550. The deducted amount of INR 450 is, in turn, paid by the
entity or the person as their TDS obligation to the central government.
Understanding TDS in Accordance to the FDs
Now let us understand in detail TDS in accordance with the Fixed Deposits(FDs)
Case 1: No TDS Deduction
The bank does not charge TDS from the interest generated from your combined FDs with the concerned
bank if it is lower than INR 40,000 in a particular year. For senior citizens of at least 60 years old, the
margin is INR 50,000.
Case 2: TDS is 10%
If your interest income exceeds the margin of INR 40,000 or INR 50,000 (in the case of senior citizens),
10% TDS will be deducted.
Case 3: TDS is 20%
If you fail to give the concerned bank your Permanent Account Number, it will impose a 20% TDS.
Case 4: When Your Total Interest Income is less than INR 2.5 Lakhs
No TDS will be subtracted if your total income is lower than INR 2.5 Lakhs. Thus, if your total income is
below INR 2.5 Lakhs/year, no TDS will be subtracted even if you receive an interest income of INR 40,000
or higher in a financial year.
Also, the bank levies TDS on your interest income if your tax liability is zero. In such cases, the bank
cannot claim TDS deductions if you submit Form 15H (for senior citizens) or 15G to the concerned bank
to claim your interest income on FDs. Section 80 TTB enables a senior citizen to claim a tax deduction
worth INR 50,000 on their interest income.
When should you pay tax on the interest income of the FD?
You should pay the tax on the interest income earned from your FDs by 31st March of every financial
year. However, if the tax you owe, including the taxes on your interest income, equals INR 10,000 or
higher, you must pay advance tax. It means you have to pay the tax in full before the financial year ends.
How do you pay tax on the Interest Income of the FD?
You can pay tax on your interest income of the FD, either on an Accrual Basis (i.e., Paying tax every year)
or on Cash Basis (i.e., Paying Tax on Maturity).
You should pay the tax on the interest income earned from your FDs by 31st March of every
financial year. However, if the tax you owe, including the taxes on your interest income, equals
INR 10,000 or higher, you must pay advance tax. It means you have to pay the tax in full before
the financial year ends.
This method requires paying tax on your interest income at your FD maturity. This method is
easy to follow, as the maturity value of your FD is already mentioned on your FD certificate.
How to Save Taxes on FDs?
You can save taxes on the interest income generated on your FDs in the following ways:-
1.Submit form 15G/H
In case your taxable income is lower than INR 2.5 Lakhs, and provided you are below 60 years of
age, submit a 15G form. Moreover, if you are 60 or older, submit a 15H form at your bank to
receive tax exemptions.
2.Book FDs in the Name of Your Family Members
You can book your FDs under the name of your family members who are elderly parents or
homemakers, as they are exempted from the tax bracket.
You can invest in multiple FDs at different banks to lower your tax liability. This will not allow
your interest income to exceed INR 40,000 in one financial year, thus saving you from paying
FDs are undoubtedly among the best investment tools because of their lucrative FD return rate and
reliability. Thus, understanding how taxes are calculated on your FD interest income and how and when
to pay your taxes is crucial if you want to maximise your financial gains.