Pay Tax on Fixed Deposit (FD)

Fixed Deposits (FDs) are a popular investment avenue for many individuals due to their safety and stable returns. However, it is essential for investors to understand the taxation implications associated with the interest income earned on Fixed Deposits.

What is a Fixed Deposit?

A Fixed Deposit (FD) is a financial instrument offered by banks and financial institutions that allows individuals to deposit a lump sum amount for a predetermined period at a fixed interest rate. This investment option is known for its safety, stability, and predictable returns.

What is TDS on Fixed Deposits, and How do You Calculate Taxation on Fixed Deposits?

Tax Deducted at Source (TDS) on Fixed Deposits is a means through which the government collects income tax at the source, i.e., directly from the interest income earned on Fixed Deposits. Banks and other financial institutions are responsible for deducting TDS on FD interest per the Income Tax Act 1961 provisions.

Tax Calculation for Interest Income

Taxation of Interest Income from Fixed Deposits involves considering it as a component of your annual income, subject to tax based on the applicable slab rates for your overall income. It is essential to categorize this income under ‘Income from Other Sources’ while filing your Income Tax Return (ITR). Notably, the computation of income tax on Fixed Deposits follows a distinct method.

Banks adhere to a Tax Deducted at Source (TDS) procedure specifically for the interest income earned from Fixed Deposits. If the interest accrued surpasses ₹40,000 (for non-senior citizen taxpayers) or ₹50,000 (for senior citizens), the bank deducts tax at the source before disbursing the interest to your account.

How TDS Works?

When individuals receive payments, the entity making the payment must withhold a certain amount of tax before disbursing the money. This withheld tax is termed as Tax Deducted at Source (TDS). TDS ensures timely payment of the government’s share of tax revenue.

• While filing your income tax return, report the gross income earned before any deductions, including the TDS. In the example, you would report an interest income of ₹2,000.
• Simultaneously, depending on your situation, you can claim the TDS amount of ₹200 deducted by the bank either as a TDS return or as a credit against your total tax liability. If you have a tax liability, the TDS amount can offset that liability. Conversely, if you have no tax liability, you can claim a refund of the TDS amount from the government.
• It is imperative not to delay reporting the interest income from Fixed Deposits until maturity, as receiving the interest earlier could potentially place you in a higher tax slab, resulting in a higher tax payment.

When Should You Pay Tax on Interest on a Fixed Deposit?

The obligation to pay tax on the interest earned from FDs arises before March 31st of the calendar year. It is important to settle any outstanding tax liabilities by this deadline. However, there is a nuance: if your total tax liability, inclusive of taxes on interest income, exceeds ₹10,000, you are mandated to pay Advance Tax. This necessitates settling the entire amount in one lump sum before the conclusion of the financial year.

Therefore, it is crucial to proactively manage your tax responsibilities, ensuring timely payments to prevent any complications in the future. To prevent the bank from deducting Tax Deducted at Source (TDS), two prerequisites must be met:

• Your entire income must be non-taxable.
• Forms 15G and 15H must be submitted to the bank before the stipulated deadline.
• Comprehending TDS in Relation to Fixed Deposits

However, TDS is not applicable if the cumulative interest income from all FDs with a bank is below ₹40,000 annually. The threshold for senior citizens aged 60 years and above is ₹50,000. Prior to Budget 2019, the TDS limit on interest income was ₹10,000.

When Does the Bank Apply a 10% and 20% TDS Deduction?

The specific situations where banks apply 10% and 20% TDS deductions can vary depending on several factors, including the type of income and your residency status.

10% TDS deduction

• If Interest on individual deposits exceeds ₹40,000 annually in non-savings accounts
• If deposits by senior citizens of ₹50,000 annually in non-savings accounts
• Interest on listed debentures and bonds
• Dividend income exceeding ₹5,000 from Indian companies

20% TDS deduction

• Withdrawal from National Savings Scheme (NSS) exceeding ₹2,500
• Repurchase of units by mutual funds
• Winnings from online games exceeding ₹10,000 (as of April 1st, 2023)
• Cash withdrawal exceeding ₹1 crore in a financial year (Section 194N)
• Payments exceeding ₹2 lakhs to contractors/professionals without PAN (Section 194C)

If you have not provided your PAN to the bank, the government will deduct TDS at the higher rate of 20% in most cases. Certain income types, like interest on savings accounts, are not subject to TDS if your total income does not fall under the taxable limit.

How do You Ensure Zero TDS Deduction by the Bank?

The bank cannot deduct TDS if the individual has no tax liability. The sole method to prevent TDS deduction by the bank is when the total income is not taxable and Forms 15G and 15H are submitted before the due date. Submitting these forms at the start of each financial year avoids the complexities associated with additional TDS deductions and subsequent refunds from the Income Tax Department.

Way Forward

Understanding and managing the tax implications of Fixed Deposit interest is vital for investors to ensure compliance with tax regulations and optimize their returns. Investors can navigate the taxation landscape and make informed financial decisions by staying informed about TDS thresholds, filing accurate ITRs, and considering tax-saving options. It is advisable to consult with a tax professional for personalized advice based on individual financial situations.

Key takeaways

• Interest earned on fixed deposits is considered as taxable income.
• Tax is often deducted at the source if the interest exceeds a specified threshold.
• Investors below the taxable limit can submit Form 15G/15H to avoid a TDS deduction.
• Tax is payable on the interest accrued, even if not withdrawn, at the time of maturity.
• Investors should receive Form 16A or 16B for TDS on Fixed Deposits, aiding in income tax return filing.