Meaning of Fixed Deposit

A fixed deposit is a safe investment instrument on which interest rate is higher than saving accounts.The term of this type of deposit is fixed hence also termed as time deposits and any amount once deposit cannot be withdrawn before the term expiry.


Taxability of interest income

The interest from fixed deposits are fully taxable. It comes under the head “Income from Other Sources” while filing income tax return. In case of fixed deposits, bank deducts tax at source at the end of each year when the interest is paid by the bank . The rate of tax deduction at source is 10% if the income from interest for each year exceeds Rs 10,000. This limit has been increased to Rs 40,000 in Budget 2019. The TDS can be deducted at the time of calculating taxable income while paying the tax to the Government by the taxpayer.

Any amount deducted by bank can be verified with Form 26AS.

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 is required to deduct TDS on the interest amount @10% as the interest amount exceeds INR 40,000.

Calculation of tax on interest income

The taxpayer only need to deduct tax deduction at source done by the bank for his interest on fixed deposit while filing return for income tax. The bank will deduct tax on his own while giving interest to the depositor.


How is tax deduction at source calculated by the bank?

Tax deduction at source is done at the rate of 10 % by the bank on the interest amount exceeding Rs. 40,000(As amended in Finance Budget ,2019). Lets understand this better with an example:

Karan has one Fixed Deposit with a bank of Rs 2,00,000 for a period of 3 years @ 8% interest per annum. In the first year, his income from interest is Rs 16,000 from the Fixed Deposit. Bank deducts Tax Deduction at Source at the rate of 10 % on the fixed deposit. The tax deduction at source will be of Rs 1600 on his Fixed Deposit. He can file deduction of Rs 1600 at the time of filing return of income tax.


When is tax on interest income payable?

If the income of interest is to be included in the total income, the tax must be paid before 31st march or end of the financial year you can say. In case there is a large amount of income from interest, the tax is paid in the form of advance tax that is to be paid on a quarterly basis.


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

When the income from interest of fixed deposit is less than Rs 40,000 in a year, tax is not applicable. When the income from interest of fixed deposit exceeds Rs 40,000, bank deducts tax at source in form of tax from the depositor. The bank deducts tax deduction at source at the rate of 10 % per annum.


Important Notes:

  • In case 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 over all income of the depositor is less than Rs 2.5 lakh but the income from interest of fixed deposit exceeds Rs 40,000, bank can not deduct tax deduction at source from his interest ( No tax deduction at source is allowed if total income is less than Rs. 2.5 lakh).
  • To avoid additional tax deduction at source by the bank or refund from IT department 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 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 post office.

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

  • Open fixed deposits with names of your family members to avoid 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 distribution of the tax in both the years.

Conclusion

The tax is applicable on the income from the interest on savings that is fixed deposits too. The tax is not paid directly to the Government, the bank itself deducts the amount of tax in the form of tax Deduction at Source (TDS) if tax is applicable on the interest income of the depositor. This tax deduction can be deducted while the tax return is filed by the taxpayer.

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?

No, only if the income from interest exceeds Rs 40,000 per annum(as amended in Finance Budget 2019) the Tax Deduction at Source (TDS) is applicable. Otherwise no tax is deducted on interest income from fixed deposits.

CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. 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.