Fixed deposits have remained a favourite of Indian investors for decades, attracting people from all income brackets, ages and professions. The reason for the popularity of the FD is simple: this investment is virtually free from risk, offering steady returns over time.
In addition, a tax saving FD offers exemption of the invested amount from your taxable income. This offers you the twin benefit of tax relief along with diversifying the risk in your portfolio.
With bank FD interest rates increasing in the recent past thanks to the repo rate hikes by the RBI, FDs have gained even more traction as a stable investment avenue. However, you may not know that your bank FD interest is liable for tax when you file your income tax return.
Read on to know more about how fixed deposits are taxed, so you can calculate your real earnings before you book an FD and pay your dues to the IT Department.
How does tax apply to a tax saving FD?
It is very easy to mistake the tax benefit offered by a 5-year tax saving fixed deposit and miss out on taking the earnings into consideration when filing your ITR. Remember, the interest you earn from your FD is liable for taxation. It comes under the header of ‘Income from other sources’ and is taxed as per your slab.
In a tax saving FD, the tax exemption that you enjoy is on the invested amount. You can invest up to ₹1.5 Lakhs in such an FD and this amount is deducted from your taxable income in your income tax calculation as per Section 80C of the Income Tax Act. However, your interest income from an FD will be taxed.
How is the interest taxed for seniors and regular investors?
Unlike a tax saving FD, a bank FD does not offer deductions on taxable income as per Section 80C of the IT Act. When you book such an FD, your interest payout is taxed as per your slab.
In this case, the bank also deducts TDS on your earnings. Tax is deducted at source by the bank during the time of payout at the rate of 10% if you have provided your PAN details to the bank. In case you have not, banks will deduct TDS at the rate of 20%.
So, it is in your best interest to ensure your PAN details are with your FD issuer at the time you book an FD. However, keep in mind that TDS deductions will be adjusted when you pay your income tax on FD earnings. This way, your tax liability will not be calculated twice by the income tax department.
You can also check the TDS deduction related to your fixed deposit investment on Form 26AS, which is a Tax Credit Statement. If needed, you will receive a TDS refund in case you are not liable to pay any tax on your FD interest payout.
However, keep in mind that TDS is only deducted by banks if your interest income goes over ₹40,000 as a regular citizen below the age of 60. If you are a senior citizen, TDS is only applicable on FD interest earnings that cross ₹50,000 as per Section 80TTB of the Income Tax Act.
Keep in mind that these thresholds of ₹40,000 and ₹50,000 apply to all fixed deposit accounts you have started. For instance, say you have booked an FD of ₹1 Lakh earning interest at 7% p.a. and another FD of ₹1 Lakh earning interest at 6.5% p.a.
You earn interest of approximately ₹7,000 and ₹6,500 at the end of one year, which comes to ₹13,500. This amount is below the threshold of ₹40,000. So, the bank will not deduct TDS.
Say your mother, a senior citizen, books a fixed deposit of ₹10 Lakhs, and her interest earnings amount to ₹70,000. In this case, the amount exceeds the threshold of ₹50,000. So, the bank will deduct TDS.
However, TDS isn’t always applicable. If your income falls below the threshold of the minimum taxable income, banks will not deduct TDS. Those whose income earnings range up to ₹3 Lakhs a year are exempt from paying income tax.
If this is the case, you will need to submit a self-declaration form to the bank issuing the FD at the beginning of the year or when you book your FD. Non-senior citizens can submit Form 15G and senior citizens can submit Form 15H for this purpose.
The same TDS principle applies when you book a company FD. Keep in mind that as of today, there are no exceptions on paying tax on your FD interest. The amount you pay is decided by the tax slab you fall under.
Another point worth nothing is that banks will deduct TDS annually, and not just when your FD matures. So, make sure you mention your annual FD interest income when you file your ITR every year.
With this information, you can assess your FD investment better and plan your finances in a more informed manner.
