Income Tax on Fixed Deposit Interest Income

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 savings 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 an individual’s income source 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 the due date. Other than this, the deductee can get credit for the TDS deducted while filing the ITR by submitting the Form 26AS or TDS certificate.

The interest from fixed deposits under Income Tax Act 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, the 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 when paying the self-assessment tax to the Government.

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.

Interest from FD for 5 years will be:

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 FCNR (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 tax on income from interest on 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.

Earning income from interest on Fixed Deposits? It's important to report this income in your ITR. The filing deadline is approaching, so it's advisable to file your Income Tax Return well before the due date. If you need assistance with e-filing, you can rely on our online CA consultation. Our experts will ensure precise ITR filing with maximum tax refunds. Don’t wait for the last date to file ITR. Book eCA Now!