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Fixed Deposits (FDs) are among the most underestimated investment tools for building financial stability. Along with keeping your money safe for the foreseeable future, FDs also help you grow your wealth substantially in the short and long run. Flexible tenures and a higher interest rate than that offered on savings accounts are among the many features that make FDs an excellent investment option.However, while interest earned on Fixed Deposits is lucrative, you must understand how the tax on FDs works. Knowing how tax on Fixed Deposits is calculated is essential, as it can impact your overall taxable income for the year. Let's find out more about this. Read more : What is a fixed deposit?
Understanding what FDs are and how they work?
Fixed Deposits are a top-rated investment tool financial institutions offer to park your money. As the name suggests, you invest a fixed amount at a predetermined interest rate and tenure. Upon maturity, you reap the benefits of a lump sum plus the interest earned on that amount.Investing in an FD account offers the advantage of a higher interest rate than what you would get on a traditional savings account and higher returns than a Recurring Deposit account. They are also not as risky as other investments, compensating for their lower liquidity feature. Read More: How do fixed deposits work?
Interest earned on an FD and its taxability
Since the interest earned on an FD comes under the 'Income from Other Sources' category, it is, therefore, fully taxable if the annual interest exceeds ₹ 40,000. After adding the interest to your gross annual income, you can determine your tax liability under your income tax slab.For instance, let's say your total income and interest earnings are in the 30% tax slab. In this case, the tax liability on your entire income (including interest from your fixed deposit) will be 30%. Read more : How to calculate fixed deposit interest? In a scenario where no TDS is deducted, you will need to add your interest and total income and pay tax on the total amount.
What is TDS?
TDS, or Tax Deducted at Source, is the tax deducted by an organisation or individual who pays another person. Income categories, such as salary, rent, commission, etc., are applicable for a TDS deduction if the amount exceeds a particular limit. However, you can adjust the deducted amount while filing your tax returns. You can claim a refund if your tax liability is lower than the deducted amount.In the case of FDs, banks usually deduct the TDS on the annual interest earned while depositing the interest amount in your account.
Important factors to know before investing in an FD
Before you choose to invest your money in a Fixed Deposit account, you must be aware of the more minute details of the process. Here are a few essential rules to keep in mind when choosing to invest in an FD account.
1. Tax on FD:
As mentioned earlier, the interest you earn on an FD qualifies as 'income from other sources' when filing your returns. Your total income plus the interest earned will determine your tax slab.
2. How FD interest is taxed:
If the interest you earn on your FD exceeds ₹ 40,000 (₹ 50,000 in the case of senior citizens), you are liable to pay a 10% tax on the FD interest earned. If you still need to submit your PAN card to the bank, the FD interest earned will be taxed at 20%. Banks, as well as post offices, follow the same interest bracket for deductions.Another noteworthy point is that the ₹ 40,000 limits are for individual FDs, not the aggregate. Consider the below example.You have two Fixed Deposit accounts with two different banks:
- Bank X gives you an interest rate of ₹ 70,000 per annum.
- Bank Y gives you an interest rate of ₹20,000 per annum.
In this case, only Bank X will deduct tax at 10% since the interest exceeds the limit.It is also important to note that this is the TDS, not the total tax liability. You can adjust your TDS accordingly once you calculate the tax on your fixed deposit as per the income tax slab.You can also diversify your FD investment so that the interest you earn does not exceed ₹ 40,000. Or, you can choose to have more than one FD account in different banks to keep the interest earned on each account below ₹ 40,000.
3. TDS exemption on FDs
:You do not need to pay income tax if your total income for a financial year is ₹ 2.5 lakhs (₹ 3 lakhs for senior citizens). In such cases, interest on a Fixed Deposit will not be subject to TDS deduction. You can submit forms 15G and 15H every financial year to qualify for FD tax exemption. If your bank deducts TDS without the forms, you can claim a refund later, when filing your tax returns.
4. Tax liability on joint FDs:
Did you know having an FD in the name of your spouse or child, even if they have no income, attracts tax? You may consider using this tactic to escape the tax radar. However, the interest earned is added to your income and is taxable. On the other hand, gifting money to your spouse is tax-free. You can invest the gifted cash because though the interest earned counts as income, it is taxable at a reduced rate.
5. Tax-saving FDs:
Another option to save tax is to invest in a tax-saving Fixed Deposit, which has a lock-in period of five years. The interest rate is constant during this period, with flexible interest payouts. This means interest can be paid monthly or quarterly or added cumulatively to the FD.Depending on your tax-slab rate, you can then claim a TDS refund, if applicable, when you file your returns. Section 80C of the Income Tax Act, 1961, allows depositors to claim up to ₹ 1.5 lakhs per annum in a five-year-tax-saving FD. Read more : Tax Calculation on Fixed Deposits
Conclusion
To sum it up, FDs are one of the most traditional financial tools in the country because of their reliability and the returns offered. This is why understanding tax on fixed deposit interest is important to help you maximise your financial gains. Unlike other investments, interest earned on FDs is entirely taxable unless you choose a long-term vehicle under Section 80C. The exemption limit is higher for senior citizens under Section 80TTB of the Income Tax Act.Having updated information regarding changing tax rates, new schemes, and provisions before investing in an FD is essential to avoid any unnecessary penalties later. Read more : Recurring Deposit Vs Fixed Deposit
FAQS - FREQUENTLY ASKED QUESTIONS
How much of the FD is tax-free ?
Banks will not deduct tax on your FD if the interest earned does not exceed ₹ 40,000 (₹ 50,000 for senior citizens). Additionally, if your total income during a financial year is at most ₹2,50,000 (₹ 3,00,000 for senior citizens), your fixed deposit will not attract a tax deduction. However, you must submit the 15G or 15H form to your bank.
How do I avoid income tax on fixed deposit interest ?
You can invest in multiple fixed deposit accounts in different banks so the interest earned on each account does not exceed the upper limit. You can also consider investing in a post office tax-saving scheme, as you can save more taxes.
How is TDS on FD calculated ?
If the annual interest earned from your fixed deposit exceeds ₹ 40,000 (₹ 50,000 for senior citizens), your bank will deduct TDS of 10%. If you still need to provide your PAN to the bank, you must pay a TDS of 20%. The limit on the interest amount is not an aggregate but a limit set for individual banks.
What is the maximum amount of FD ?
While there is no maximum limit to how much you can invest in an FD, you can always check with your bank. However, you should consider that more significant amounts will lead to higher interest earnings, consequently causing a higher tax liability. Consider investing your money in multiple fixed deposit accounts to receive tax benefits.
Which FD is tax-free in India ?
The tax-saving fixed deposit, usually with a lock-in period of five years, is an excellent option if you are keen on reducing your tax liability. You can claim up to ₹ 1.5 lakhs per annum under Section 80C of the Income Tax Act.
How much interest income is taxable ?
The interest you earn from your fixed deposit is fully taxable. You must add the interest earned to your total annual income to determine your tax slab. Additionally, if you earn an interest of more than ₹ 40,000 (₹50,000 for senior citizens) through your FD, your bank will deduct TDS annually.
Can we claim TDS on FD ?
You can claim TDS on your FD when you file your yearly returns. If your income falls below the tax slabs, you can avoid TDS on your FD by submitting forms 15G or 15H to your bank.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
