If you’re looking to invest your hard-earned money, fixed deposits (FDs) are a reliable and popular choice of investment. They offer guaranteed returns and are relatively low-risk compared to other investment options. However, there seems to be a bit of confusion regarding the tax laws concerning fixed deposits in India.
If you’re scratching your head and wondering how to navigate through the complex tax laws, then this blog is just for you. In this post, we’ll break down everything you need to know about the income tax on fixed deposit interest, let’s learn if is fixed deposit taxable.
Is FD Interest Taxable?
The Income Tax Act of 1961 states that the interest earned on fixed deposits (FDs) is classified as “income from other sources,” and, therefore, is subject to full taxation. When calculating your tax liability, the interest income received from FDs is added to your total annual income, and the applicable tax laws are used to determine the amount of tax you owe.
How Interest Earnings are Taxed in India?
In India, income tax is applicable to interest earned on fixed deposits, and it is essential to include this income in the taxpayer’s total income. The applicable slab rates will be used to calculate the tax liability, and this income must be reported under the head “Income from Other Sources” when filing an Income Tax Return.
For individuals, excluding senior citizens, if the interest earned on fixed deposits is more than ₹40,000, the bank will deduct tax at source (TDS) at the time of crediting the interest to the account. However, for senior citizens, the threshold for a TDS deduction is ₹50,000.
It’s essential to note that banks deduct TDS at the time of credit of interest, not at the time of maturity of the fixed deposit. As a result, if a fixed deposit has a tenure of three years, banks will deduct TDS at the end of each year.
Let’s consider a few examples to understand how you can calculate your tax on FD interest.
Kavya falls under a 20% tax bracket and has two fixed deposits (FDs) with a bank, each amounting to ₹1,00,000 with a 6% annual interest for 3 years. In the first year, Noopur earns a total interest of Rupees 12,000, with Rupees 6,000 from each FD. Since the interest earned is below Rupees 40,000, the bank does not deduct any TDS (Tax Deducted at Source) from her account.
On the other hand, Dhruv has a single FD of Rupees 10 lakh at 6% interest per annum, which generates an annual interest of ₹60,000. The bank levies a TDS of 10% on the entire interest amount, and consequently, Rupees 6,000 is deducted from his account and remitted to the central government as tax.
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When to Pay Tax on Interest Income?
If you earn interest income that is taxable, you are required to pay the corresponding tax on or before March 31st of the financial year. This payment method allows you to settle any tax debt you may have.
However, if the amount of tax you owe, including the interest income you earned, is more than ₹10,000, then you are obligated to pay Advance Tax. To comply with this regulation, you must make quarterly payments of advance tax in instalments.
Ways to Reduce Tax on FD Interest
In order to save Tax Deducted at Source (TDS) on Fixed Deposits (FDs), there are various methods that can be employed. Below are four simple ways that can help achieve this:
Submitting Form 15G/15H
By submitting Form 15G, an investor can state that they have no taxable income, which will prevent the bank from deducting any TDS on the interest earned. For senior citizens, the relevant form to avoid TDS is 15H.
Distributing FD investment
Another method to avoid TDS is to split the deposit into separate banks in a way that ensures the interest earned from any of the FDs does not exceed the limit of ₹10,000.
Timing the FD
One can also save TDS by timing their FD in a way that ensures the interest earned in any given financial year does not exceed ₹10,000. For instance, a 12-month fixed deposit of ₹1 lakh at 10.5% interest could be started in September, as the financial year closes on 31st March. This way, the interest earned would be split between two financial years, and thus TDS would be avoided.
Splitting the FD
Another method to reduce the TDS on Fixed Deposits is to divide the investment into an individual’s personal account and a HUF (Hindu Undivided Family) account. By doing this, the interest earned on each account is evaluated as separate entities, and the interest received on each account will remain below the TDS limit.
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Paying taxes on our income is a crucial aspect of being a responsible citizen. The tax laws in India are designed to ensure that individuals and businesses contribute to the development of the country. As we earn more and seek to invest in reliable savings options such as Fixed Deposits, it’s important to understand the tax implications of the interest earned.
Being aware of tax laws can help us make informed decisions and maximize our returns especially when it comes to Fixed Deposits. Seeking the guidance of financial experts or using online tools like financial calculators can help in making informed investment decisions.
Is FD tax free?
No, the income earned from a fixed deposit is not exempt from taxes. Income tax on fd interest is applicable as per the income tax rates. Additionally, investing in a tax-saving fixed deposit for a period of 5 years allows individuals to claim a tax deduction under Section 80C of the Income Tax Act.
How much fd interest is tax free?
No, you don’t get interest on your mutual funds. However, you get returns based on the fund’s performance in the market you have invested in.
Is it necessary to show fd interest in itr?
Investment options are never completely risk-free. Similarly, even mutual funds have high risk since they are linked to the market, and your returns are based on market volatility.
Will I be issued a certificate for TDS on FD?
If tax has been deducted at source (TDS) on the interest payment made to you, a TDS certificate will be issued to you. The entity that has paid you the interest income will issue the TDS certificate every quarter. This certificate serves as a proof of tax deduction and is required to be submitted while filing your income tax return. It contains details of the TDS amount deducted, the rate at which it was deducted, and the date of deduction, among other information.
Is TDS on FD interest for all senior citizens?
Tax is not deducted on fixed deposits for senior citizens unless the total interest earned during a year exceeds Rs 50,000.