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Income Tax on Fixed Deposit Interest Income

Updated on: 21 Jun, 2023 02:54 PM

Fixed deposits are considered the most secure avenue for investing your hard-earned money in India. But like every other good thing, it also comes with a price. You need to disclose the earning while filing your income tax return, which also has tax implications. Let’s decode the returns on Fixed Deposits, their taxation impact, and how to save taxes.

What is a Fixed Deposit?

A fixed deposit is a lump sum investment with a fixed maturity tenure. You can open a fixed deposit with any bank or financial institution. It is a safe investment with a predetermined interest rate slightly higher than saving accounts. Since the time period of investment is fixed, and no premature withdrawals are permissible, it is also known as term deposits.

What is TDS on Fixed Deposit?

Collecting tax from the income source of an individual is known as Tax Deducted at Source(TDS). TDS (Tax Deducted at Source) on Fixed Deposits (FD) is a mechanism by which the bank deducts a certain amount of tax from the interest income earned on fixed deposits before crediting it to the depositor's account. This is generally deducted by the bank and deposited to the Income tax Department on due date. Other than this the deductee can get the credit of TDS deducted while filing the ITR by submitting the Form 26AS or TDS certificate.

The interest from fixed deposits is fully taxable. It comes under “Income from Other Sources” while filing an income tax return. FD Interest is taxable at your slab rate along with applicable surcharge/cess.

In the case of fixed deposits, the bank or financial institutions deduct tax at the source at the end of each year when they pay the interest. The tax deduction rate at source is 10% if the income from interest for each year exceeds Rs 40,000 or, in the case of Senior citizens threshold limit is Rs. 50,000. However, if you don’t submit your PAN card, TDS @ 20% is deducted from your interest income. Any amount deducted as TDS can be verified with Form 26AS. The TDS can be deducted when calculating taxable income or while paying the self-assessment tax to the Government.

Interest Paid or Payable By Threshold Limit Nature of Interest
Senior citizen Other Person
Co-operative engaged in business 50,000 40,000 Interest on time deposits
Co-operative engaged in the banking business 50,000 40,000 Any other interest
Primary Agricultural Credit Society 50,000 40,000 Any interest
Co-op. Land Mortgage Bank 50,000 40,000 Any interest
Co-op. Land Development Bank 50,000 40,000 Any interest
For example-
If Mr X has a fixed deposit for 5 years, and has earned an interest of INR 50,0000 every year. So the bank must deduct TDS on the interest amount @10% as the interest amount exceeds INR 40,000.

Don’t want your TDS to be deducted? Click here to read.

How is TDS on fixed deposit calculated?

The calculation of TDS (Tax Deducted at Source) on fixed deposit (FD) interest is based on the following factors:

  1. Applicable TDS Rate: The TDS rate for FD interest is typically 10% for resident individuals. However, if the depositor has not provided their PAN (Permanent Account Number), the TDS rate increases to 20%. For non-resident individuals, different rates may apply based on their tax status and any applicable tax treaties.
  2. Threshold Amount: TDS is applicable if the total interest income from all fixed deposits with a particular bank exceeds a specified threshold in a financial year. The threshold is currently Rs. 40,000 for individuals (Rs. 50,000 for senior citizens).

To calculate TDS on FD interest, follow these steps:

  1. Determine the Total Interest Income: Add up the interest income earned from all fixed deposits held with a specific bank during the financial year.
  2. Check if the Threshold is Exceeded: TDS will be applicable if the total interest income exceeds the applicable threshold (Rs. 40,000 for individuals).
  3. Calculate the TDS Amount: Multiply the total interest income exceeding the threshold by the applicable TDS rate (10% for most individuals). The result is the TDS amount that will be deducted.

For example, suppose the total interest income from fixed deposits is Rs. 60,000 and the threshold is Rs. 40,000, Once the interest exceeds the above limit. In that case, tax is to be deducted on the entire amount of interest. If the applicable TDS rate is 10%, the TDS amount will be Rs. 6,000 (Rs. 60,000 x 10%).

It's important to note that the bank will deduct the TDS amount from the interest income before crediting it to your account. The deducted TDS is reflected in the TDS certificate (Form 16A) provided by the bank, which can be used for tax filing purposes.

What if TDS is not deducted?

Even if TDS is not deducted every year, Add the interest income to your total income. Because if you don’t, then in the last year(i.e.5th, Year), the consequences will be –

  • You get an income tax notice for not reporting your income.
  • The year it is added puts you in a higher tax slab, thus resulting in higher tax payments.

Let me explain to you with an example-

Suppose Aakriti has an income of Rs. 9.5 Lakhs. hence she belongs to the 20 % tax bracket. She has an FD of Rs 2 lakh with a bank that gives her 8 % interest per annum. So, the interest she earns on the FD for the current financial year is Rs 16,000. (Remember, banks tax FDs at 10 percent only.)

Now, Aakriti is liable to pay tax on the interest she earns at the same tax rate as she pays for her gross income.

Hence, the total tax Aakriti needs to pay on interest earned is:
20% of Rs 16,000 = Rs 3,200
The bank deducts TDS of 10% on interest income:
= 10%of Rs 16,000 = Rs 1,600
Therefore, the balance tax payable by Aakriti is 3,200 – 1600 = Rs 1,600
So, Total tax Aakriti needs to pay extra Rs 3200.

Interest from FD for 5 years will be:

Rs. 16,000 * 5 = Rs. 80,000
Interest is taxable whether you pay it yearly or not.
Before, Aakriti showed an income of Rs. 9,66,000 every year.
But if she hadn’t been paying taxes on her interest income, then after the maturity period of FD her income will be Rs. 10,30,000.
So this added value leads her into the 30% tax bracket. This means she will have to pay more taxes.
Hence, adding such a large amount in the 5th year would result in more income tax payments.

What are the situations in which TDS is not required to be deducted?

The TDS (or tax) on fixed deposit interest shall not be deducted in the following cases:

  • If you are a senior citizen and the total interest amount does not exceed Rs 50,000 for the financial year.
  • You have opened a Fixed Deposit account in a Post Office.
  • If you have NRE (Non-Resident External) or FCDR (Foreign Currency Non-Resident) FD.

When is the tax on interest income payable?

If the interest income is to be included in the total income, the tax must be paid before 31st March or the end of the financial year. In case there is a large amount of income from interest, and the Tax is more than Rs. 10,000 for the year, the tax should be paid in the form of advance tax that is to be paid quarterly.

Important Notes:

  • If the depositor does not give information regarding PAN, the tax deduction at source done by the bank is at the rate of 20% per annum.
  • If the overall income of the depositor is less than Rs 2.5 lakh but the income from the interest of fixed deposit exceeds Rs 40,000, and depositor has submitted the prescribed form to the bank then no tds shall be deducted from his interest income ( No tax deduction at source is allowed if total income is less than Rs. 2.5 lakh).
  • To avoid tax deduction at source by the bank you should submit Form 15G and Form 15H to the bank at the beginning of each financial year.
  • In case of interest from fixed deposits for senior citizens tax exemption is Rs 50,000 per annum under section 80TTB.
  • In case of interest from fixed deposits for Non-Resident Ordinary(NRO) Tax Deduction at Source (TDS) is charged at the rate of 30%.
  • In the case of Non-Resident External(NRE) or Foreign Currency Non-Resident (FCNR), fixed deposits are tax-free, so no Tax Deduction at Source (TDS) is charged.
  • Tax Deduction at Source (TDS) is not applicable on either Time Deposit (FD) or Recurring Deposit (RD) that are made with the post office.

How to save a tax on income from interest of fixed deposits?

  • Open fixed deposits with the names of your family members to avoid the tax burden of interest on the taxpayers.
  • Fixed deposits made at the right time of the year that is middle or closer to the end of the year may reduce the burden by the distribution of the tax in both the years.

Frequently Asked Questions

Q- Is income from interest on fixed deposit is taxable?

Yes, income from interest on fixed deposits is taxable under the head income from other sources.

Q- Tax is deducted by the bank at what rate for a fixed deposit?

Tax is deducted in the form of Tax Deduction at Source (TDS) by the bank for interest income from fixed deposits. The rate of tax deduction at source is 10 % if the income from interest for each year exceeds Rs 40,000. If the interest income is below Rs 40,000, no Tax Deduction at Source (TDS) is deducted by the bank.

Q- Do all interest income from fixed deposits are liable for taxation?

Yes, all interest income on FDs are subject to Taxation. The TDS is deducted only if the income from interest exceeds Rs 40,000 per annum(as amended in Finance Budget 2019) Otherwise, no tax is deducted on the interest income from fixed deposits.

Q- How to calculate tax on interest income?

Income tax on Interest income shall be calculated as per the slab rate applicable to the taxpayer.

Q- When is tax deduction at source chargeable in case of a fixed deposit?

Tax is not applicable when the income from the interest of a fixed deposit is less than Rs 40,000 in a year. When the income from the interest of a fixed deposit exceeds Rs 40,000, the bank or financial institution deducts tax at the source in the form of tax from the depositor. The bank deducts tax deduction at source at 10 % per annum if PAN details are furnished and 20% otherwise.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.