Fixed Deposits (FDs) are one of the most popular investment options known for their safety, predictable returns, and flexibility. However, while FDs offer a guaranteed return on investment, the interest earned on them is subject to income tax. In this blog, we will break down everything you need to know about the taxation of FD interest, including tax rates, exemptions, and strategies to minimize your tax liability.
1. Taxability of Fixed Deposit Interest
Interest earned on a Fixed Deposit is considered as Income from Other Sources under the Income Tax Act, 1961. This means that the interest earned is added to your total income and taxed as per your income tax slab.
A. Tax on Interest for Residents
If you are a resident Indian, the interest income earned from your fixed deposit will be added to your total income for the year. Based on your total taxable income, the interest will be taxed as per your applicable income tax slab rate.
Example 1: If your total income (including FD interest) is ₹5,50,000, and the FD interest is ₹50,000, the FD interest will be taxed according to your tax slab (5% for income between ₹2.5 lakh and ₹5 lakh).
B. Tax on Interest for Non-Residents (NRIs)
For Non-Resident Indians (NRIs), the interest on fixed deposits in India is taxed at a flat rate of 30%, irrespective of the income tax slab applicable to them in their home country.
2. Tax Deducted at Source (TDS) on Fixed Deposit Interest
Banks and financial institutions are required to deduct TDS (Tax Deducted at Source) on FD interest payments if the total interest income in a financial year exceeds a specified threshold.
Threshold Limits for TDS:
For Individual/ HUF: TDS is deducted if the interest income exceeds ₹40,000 in a financial year (₹50,000 for senior citizens aged 60 years and above).
For NRIs: TDS is deducted at the rate of 30% on the interest earned from Fixed Deposits.
If your total interest income from all fixed deposits is less than the threshold limit, no TDS will be deducted.
TDS Rate:
For individuals below 60 years: TDS rate is 10% if your PAN is provided.
For individuals above 60 years (senior citizens): TDS rate is 20% (if PAN is not provided).
For NRIs: TDS is deducted at 30%.
Example:
If you earn ₹50,000 in interest from your FD, and you are below 60 years of age, the bank will deduct ₹5,000 as TDS (10% of ₹50,000).
For senior citizens (age 60 or above), TDS will be deducted at the rate of 20% on interest exceeding ₹50,000 in a financial year.
3. TDS Exemption and Lower Deduction Certificate
You can avoid or reduce TDS on your fixed deposit interest by submitting a Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to the bank if:
Your total taxable income is below the basic exemption limit (₹2.5 lakh for individuals below 60 years).
You do not expect to exceed the income limit for TDS deduction.
Alternatively, if your total income is taxable, but you believe the TDS is being deducted at a higher rate, you can apply to the Income Tax Department for a lower deduction certificate. This certificate will allow the bank to deduct TDS at a lower rate as specified by the department.
4. Tax Treatment on Interest Before and After Maturity
The interest on Fixed Deposits is taxable on an accrual basis, meaning tax is payable in the year the interest is earned, even if the interest is not actually received. This is true for both quarterly interest and cumulative Fixed Deposits (where interest is paid at maturity).
Quarterly Interest FDs: The interest income will be taxed in the quarter it is credited to your account. Even if you don’t withdraw the interest, it will be added to your taxable income.
Cumulative FDs: The interest earned during the tenure will be taxed each year, although it is paid out only at maturity.
5. How to Calculate Income Tax on Fixed Deposit Interest
To calculate the income tax on FD interest, follow these steps:
Total Interest Earned: Add up all the interest earned on your Fixed Deposits during the year.
Check Taxability: The total FD interest will be added to your total income and taxed according to your income tax slab.
TDS Deduction: Subtract any TDS deducted by the bank. You can claim this amount as a tax credit when filing your tax return.
File Your Tax Return: If TDS is deducted, ensure you mention the TDS amount in your Income Tax Return (ITR) while filing your tax return.
6. Claiming Tax Credit for TDS Deducted
If TDS has been deducted on your FD interest, you can claim a credit for the amount deducted when you file your Income Tax Return (ITR). This ensures that the tax deducted at source is not charged again.
Steps to Claim TDS Credit:
Check Form 26AS: Ensure that the TDS deducted is reflected in your Form 26AS. This is an online tax credit statement.
File Your Tax Return: While filing your return, include the amount of TDS under the TDS section of your ITR form.
Claim Refund if Applicable: If excess TDS has been deducted (for example, you are in a lower tax bracket), you can claim a refund when filing your return.
7. Tax Saving Strategies on FD Interest
While the tax on FD interest is inevitable, there are a few strategies you can use to minimize the impact:
A. Invest in Tax-Saving Fixed Deposits
Tax-saving FDs, under Section 80C of the Income Tax Act, offer a deduction of up to ₹1.5 lakh. However, the interest earned on these FDs is still taxable. The primary benefit is the deduction from taxable income, which reduces your overall tax burden.
B. Opt for Cumulative FDs
If you have long-term goals, consider opting for cumulative fixed deposits, where interest is reinvested and paid out at maturity. This allows you to defer the tax liability on interest until maturity.
C. Invest in Senior Citizens Savings Scheme (SCSS)
For senior citizens, SCSS provides better returns and tax benefits than regular FDs. While the interest is still taxable, the scheme offers higher rates, and the interest is paid quarterly.
8. Conclusion
The taxation of fixed deposit interest is straightforward but important to understand for effective tax planning. The interest earned on FDs is taxable, and banks deduct TDS on interest income above a certain threshold. By filing your taxes correctly and utilizing exemptions or deductions, you can minimize the tax impact on your FD interest.
To make the most of your FD investments, keep track of your interest income, and ensure that TDS is deducted appropriately. Always file your income tax return accurately, reflecting any TDS deducted and claiming refunds if necessary.
If you're unsure about how FD interest is taxed or how to file your tax return, it’s always advisable to consult a tax professional.
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