A fixed deposit (FD) is an investment that pays interest over time. When the FD matures, the investor receives both the interest and the principal amount. In addition, the Deposit Insurance Guarantee Corporation of India (DIGCI) insures FDs up to Rs. 5 lakh.
It makes FDs one of the safest investment vehicles available, particularly for risk-averse investors. FDs have many other advantages, even though the returns aren’t tax-free. All you need to know about interest on fixed deposits and income tax.
The interest on a savings account is taxable. It’s added to your total earnings and taxed at the same slab rates as the rest of your earnings. ‘Income from Other Sources’ is the category investors should mention on their tax returns.
However, keep in mind that TDS is deducted when the FD interest rate is credited, not when the FD matures. As a result, if you have a three-year FD, the financial institution will withhold tax on FD interest from it at the end of the year.
Fixed Deposits (FDs) allow you to fully utilise Section 80C, which will enable you to deduct Rs 1.5 lakh from your taxable income. It also provides capital protection as well as some interest income. The interest earned on the fixed deposit, on the other hand, is taxed. Investors rarely consider paying interest income taxes on schedule. When and how to pay income tax on FD interest income will be discussed in this post.
What is the tax on FD interest?
Fixed Deposit interest income is fully taxed. It will be added to your total income and taxed at the slab rates that apply to your entire income. It should be declared on your tax return under’ Income from Other Sources.’
For persons other than senior citizens, financial institutions deduct tax on FD interest at source when crediting interest to your account if interest exceeds Rs.40,000.
(The barrier for older citizens is Rs.50,000).
As a result, it’s important to remember that the TDS is deducted when the interest is credited, not when the FD matures. So, if you have a three-year fixed deposit, the financial institution will deduct TDS at the end of each year. (See below for more details on TDS on FDs).
Understanding what TDS is:
When you receive certain payments, the person making the payment must deduct tax first. TDS stands for tax deducted at source, which they pay to the government.
You will receive a tax-free credit for the amount you paid. The gross amount must subsequently be included in your income when filing your income tax return. In contrast, TDS credit is given from the entire tax liability, or a TDS refund is provided in the case of no tax due.
For example, if you earn Rs.100 in FD interest, the financial institution will deduct 10% TDS, or Rs.10, and deposit it with the government. You must record the total interest generated of Rs.100 in your ITR and claim the TDS deducted by the financial institution of Rs.10 as a TDS refund or tax credit from the outstanding debt, as the case may be while reporting interest income in ITR.
TDS for FDs: What You Need to Know
When is TDS not deducted by the financial institution:
The financial institution cannot take any TDS if your total interest income from all FDs with the financial institution is less than Rs 40,000 in a year. In the case of a senior citizen aged 60 and above, the ceiling is Rs 50,000.
TDS on interest income was limited to Rs. 10,000 before Budget 2019.
When does the financial institution deduct TDS at a rate of 10%?
The financial institution calculates your annual interest income from all of your FDs with the financial institution. If your interest income reaches Rs 40,000, you would be subject to a 10% TDS deduction (Rs 50,000 in the case of senior citizens). TDS on interest income was limited to Rs. 10,000 before Budget 2019.
When does the financial institution deduct TDS at a rate of 20%?
If you do not disclose your PAN number to the financial institution, they will deduct 20% TDS from your account. As a result, double-check that the financial institution has your PAN number.
If your total annual income is less than Rs. 2.5 lakh,
No TDS is deducted when your total income is less than the taxable minimum. Some investors may earn more than Rs 40,000 in interest income per year, but their total income (including interest income) falls below the exempt income threshold (Rs 2.5 lakh for FY 2019-20).
When an individual owes no tax on FD interest, the financial institution cannot deduct TDS. However, where you file Form 15G or 15H to claim interest income without TDS, the financial institution will not deduct TDS.
How can I assure that the financial institution deducts no TDS?
When your total income is not subject to tax, and you submit Form 15G and Form 15H to the financial institution before the due date, the only method to ensure that the financial institution takes no TDS is if your entire income is not subject to tax.
To prevent the trouble of further TDS deduction and subsequent refund from the IT Department, submit these documents at the start of each financial year.