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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.
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.
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 |
Don’t want your TDS to be deducted? Click here to read.
The calculation of TDS (Tax Deducted at Source) on fixed deposit (FD) interest is based on the following factors:
To calculate TDS on FD interest, follow these steps:
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.
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 –
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.
The TDS (or tax) on fixed deposit interest shall not be deducted in the following cases:
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.
Yes, income from interest on fixed deposits is taxable under the head income from other sources.
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.
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.
Income tax on Interest income shall be calculated as per the slab rate applicable to the taxpayer.
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.
