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Taxation of Interest on Fixed Deposits: A Guide to Financial Benefits
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No, FD interest is a taxable receipt. However, if your total income, including FD interest, is below the taxable limit, and you submit Form 15G or 15H for non-deduction of TDS by the Bank.
For depositors below the age of 60 years, TDS is applicable if interest income exceeds Rs.40,000 in a financial year, and for senior citizens, the threshold is Rs.50,000.
Income Tax Saver Fixed Deposit is a type of FD that offers tax benefits under Section 80C of the Income Tax Act, allowing deductions of the invested amount. However, one may note that there is a lock-in period of 5 years for this FD i.e. it cannot be pre-matured except in case of the death of the depositor.
Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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Fixed Deposits (FDs) are a popular investment choice for individuals seeking stability and assured returns. However, it is essential to understand the tax implications of FD interest income, as this can impact your overall returns. Let us learn more about the Fixed Deposit Income Tax exemption, the role of Tax Deducted at Source (TDS), and how to calculate and manage your tax liabilities effectively.
How is Interest Income Taxed on Fixed Deposits?
Interest income earned from Fixed Deposits is fully taxable and added to your total income for the year. The rate at which it is taxed depends on your tax slab. For example, if you fall in the 20% tax bracket, you will be liable to pay 20% income tax on Fixed Deposit interest.
When you report your income for tax purposes, the interest earned on your FDs needs to be offered to tax in the Income Tax Return (ITR). To ensure proper taxation, banks deduct TDS (Tax Deducted at Source) on the interest income generated from your FDs. This TDS amount is paid directly to the government on your behalf.
TDS (Tax Deducted at Source) on Fixed Deposits
Banks deduct TDS on FD interest income when the interest earned in a financial year exceeds Rs.40,000 for regular depositors and Rs.50,000 for senior citizens. The TDS rate is generally 10%, but it can be higher if you have not furnished your PAN details. For those who fall under higher tax brackets, the TDS may not cover their entire tax liability, requiring additional tax payments while filing returns.
TDS also applies to Recurring Deposits (RDs), but it is worth noting that it is calculated and deducted on a per-year basis, not a per-installment basis.
How to Calculate Tax on Interest Income
To calculate the income tax on Fixed Deposit interest income, you can follow these steps:
Online calculators and tools are available to simplify this process. Let us look at a couple of practical examples:
Example 1: Ritwik's 3-year Fixed Deposits (FD)
Ritwik earns an annual interest of Rs.25,000 on his FD. His total taxable income, including the interest income, falls in the 20% tax bracket. Therefore, he must pay Rs.5,000 (Rs. 25,000*20%) plus applicable surcharge & cess asa tax on his FD interest income while filing a tax return.
Example 2: Mr. Anurag's Fixed Deposits (FD)
Mr. Anurag earns Rs.70,000 as interest income from his FD. The bank has deducted 10% TDS (Rs.7,000). However, his total taxable income puts him in a 30% tax bracket. Therefore, he must pay an additional Rs.14,000 (Rs. 70,000*20%= Rs.21,000 – Rs.7000 {TDS}) plus applicable surcharge & cess while filing tax return.
When and How to Pay Tax on Interest Income
The deadline for paying tax on interest income is typically before the end of the financial year. It is crucial to meet this deadline to avoid penalties. If you anticipate a significant tax liability due to your FD interest income, consider paying Advance Tax in instalments to prevent a heavy tax burden at the end of the financial year.
You can pay the due tax through the online tax portal or authorised bank branches. It's essential to keep track of your tax payments and maintain accurate records.
Understanding TDS in relation to FDs
Banks will not deduct/deduct lower TDS if:
Conclusion
Understanding the taxation of Fixed Deposit interest income is crucial for managing your finances effectively. You can maximise your returns from FD investments by being aware of TDS rules, calculating your tax liabilities, and using available exemptions. Remember that timely tax payments and accurate reporting are essential for a hassle-free financial experience.
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