Fixed deposits are a popular investment option among individual taxpayers seeking guaranteed returns. However, it's important to understand that interest income from fixed deposits is subject to taxation. You may have noticed tax deductions through TDS (Tax Deducted at Source) on your interest income, and the actual interest income may be lower than expected.
In this blog, we will discuss how interest income from fixed deposits is taxed and the implications of TDS. By the end, you will have a clear understanding of the taxation process and how to manage tax liabilities on your fixed deposits.
Tax on FD Interest
Interest income earned from fixed deposits is fully taxable. It is considered "Income from Other Sources" and should be added to your total income. The applicable income tax slab rates are then applied to determine your tax liability. Make sure to report this income in your Income Tax Return under the appropriate section.
What is Tax Deducted at Source (TDS)?
The Income Tax Department mandates TDS as a mechanism to collect taxes at the source. When the interest amount from your fixed deposits exceeds ₹40,000 (₹50,000 for senior citizens), banks deduct TDS at the time of interest credit. It's important to note that TDS is deducted at the time of interest credit and not at the maturity of the FD. For example, if you have a 3-year FD, the bank will deduct TDS at the end of each year.
How to Calculate Tax on FDs?
Bank and NBFC fixed deposits are all subject to tax deductions. And there are distinct thresholds of interest deductions based on different age groups. If your interest income exceeds the threshold, the bank deducts TDS at the applicable rate before crediting the interest to your account.
Tax on Bank FDs
If you are below 60 years old, any interest income you earn from your fixed deposit will be taxable if it exceeds ₹40,000. For senior citizens (those aged 60 and above), the threshold is higher at ₹50,000. The tax deducted on the interest earnings is 10%.
Tax on Non-Bank (NBFCs) FDs
For fixed deposits with NBFCs, the tax threshold for interest earnings is set at ₹5,000. If your earnings from the fixed deposit go above this amount, they become taxable. The TDS is 10%. However, if your interest earnings exceed the mentioned amount and you don't provide your PAN details to the bank or NBFC, the TDS deduction increases to 20% of the interest earned.
Managing TDS and Tax Liability
TDS serves as an advance tax payment toward your final tax liability. If the bank does not deduct TDS from your interest income, you are responsible for adding the entire interest earned from all your fixed deposits to your total income and paying taxes accordingly.
Let's understand this with an example: Suppose your FD interest is ₹100, and the bank deducts 10% TDS, i.e., ₹10. The bank deposits this TDS amount directly to the government on your behalf. When reporting your interest income in your ITR, you need to mention the full interest amount of ₹100 and also claim a refund or tax credit for the ₹10 TDS deduction. This credit will be adjusted against your outstanding tax liability.
Form 15G and Form 15H: Avoiding TDS Deduction
To avoid a TDS deduction from your fixed deposit interest, you need to ensure that your total income is not subject to tax. If your income falls below the taxable limit, you can submit Form 15G (for individuals) or Form 15H (for senior citizens) to the bank before the due date.
These forms declare that your income is below the taxable threshold, relieving the bank from deducting TDS. It is essential to submit these forms at the beginning of each financial year to avoid additional TDS deductions and potential refund hassles.
Key Takeaways
- Interest income from fixed deposits is subject to taxation.
- TDS is deducted by banks on interest income exceeding ₹40,000 (₹50,000 for senior citizens).
- TDS on FD is deducted at the time of interest credit, not at maturity.
- TDS deduction is 10% for both bank and NBFC FDs, but it increases to 20% if PAN details are not provided.
- Form 15G (for individuals) and Form 15H (for senior citizens) can be submitted to avoid TDS deduction if income is below the taxable limit.