India Markets close in 1 hr 16 mins

Fixed Deposit Taxes – How do they work?

ClearTax
ClearTax helps Individuals prepare and file their Income Tax Returns online in India. www.cleartax.in

Many of us who maintain fixed deposits in banks do so out of habit, and often neglect to consider the income we earn from them while calculating our Income for the year. This is a fundamental error that can eventually lead to a notice by the Income Tax department.

Treat interest from FDs just as you would treat income from any other source, e.g. income from rental property. Make sure you declare your FD income conscientiously under “Income from Other Sources” while filing your tax returns. The Form 26AS includes a record of all the TDS payments deducted on your Fixed Deposits. When youfile your returns on ClearTax, ClearTax automatically imports these entries from the Income Tax Department records.

Remember, FDs will also be taxed at the same rate as the rest of your Gross Income is taxed at. This means, if you are in the 20% tax bracket, you will have to pay 20% tax on your interest income from FDs.

Also See: Fixed Deposit rates offered by Indian banks. Click on image below

Aren’t taxes already deducted on my FDs?

TDS or Tax Deducted at Source is the Income Tax department’s way of automating tax collection, to an extent. The tax on interest from any FD is paid partially via TDS deducted by the bank and the rest is paid as Self-Assessment Tax by the individual.

Banks deduct TDS on interest only if the interest amount for an F.D is greater than Rs.10,000 per year. The rate of TDS deducted by banks is 10% on interest income, provided your PAN number is available with the bank. If the bank doesn’t have your PAN in its records, TDS is deducted at 20% on interest income.

  • If your total income is below the minimum tax slab (10%), the TDS on FD interest that is deducted by banks can be recovered by claiming a refund for the TDS amount at the time of tax filing.

    Alternately, You can submit the “Form 15G” to the bank declaring that since your taxable income for the year will be below the minimum tax slab, the bank shouldn’t deduct TDS on your FD Interest.

 

  • Senior Citizens are also exempt from paying TDS on FD interest as a special concession by the IT department. They need to submit Form 15H to ensure they aren’t charged TDS on their F.Ds.

 

  • Individuals in higher tax brackets like 20% or 30% need to pay Self-Assessment Tax over and above the TDS deducted on their interest income.

 

Let’s understand this with an example.

  • Ashok belongs to the 30% tax bracket and he has an FD with a Bank of Rs 10 lakhs that gives him a 9% interest per annum. So, the interest he earns on the FD for the current financial year is Rs. 90,000 (Remember, banks tax FDs at 10% only)

 

  • Now, Ashok is liable to pay tax on the interest he earns at the same tax rate as he pays for his Gross Income.

 

  • Hence total tax Ashok needs to pay on interest earned = 30% of Rs.90,000 = Rs.27,000

 

  • The Bank deducts TDS of 10% on interest income = 10% of Rs.90,000 = Rs.9000

 

  • Therefore the balance tax payable by Ashok as Self-Assessment Tax is 27,000 – 9,000 = Rs. 18,000.

 

Common Doubts with FDs

Are Tax-saver FDs treated differently?

The short answer to this question is - No. The only additional benefit of a tax-saver FD over a regular FD is that the original amount that you invest in a tax saver FD is exempt from taxes and can be claimed as a deduction under Section 80C while filing returns. The interest income that is generated from such F.Ds is subject to the same tax rules as any other regular FD

 

When to Pay Tax on Interest Income?

Banks deduct TDS on interest as and when interest is accrued, not when interest is paid out. This TDS deducted reflects in your Form 26AS automatically. Hence to prevent confusion in the Form 26AS, it is advisable to pay Self Assessment Tax on your interest income (if applicable) on a yearly basis, and not when the FD matures.

There’s another compelling argument in favour of yearly tax payment on interest income. When you declare interest income as a lump sum amount when your FD matures, there is a possibility of you being bumped up to a higher tax slab and paying higher taxes overall. To prevent this, simply pay the tax accrued on your interest income on an annual basis.

If you still have queries regarding FD incomes or any other taxation related worry, feel free to contact the tax gurus atClearTax.