As an Indian citizen saving your hard-earned money in Fixed Deposits (FDs), you need to be aware of the tax implications on the interest earned. The interest you earn on fixed deposits is taxable as per your income tax slab.
To accurately calculate the tax on your fixed deposit interest and file your income tax return, you must understand how FD interest is taxed. Let’s understand how tax on fixed deposit interest in the country works and help you gain clarity on how your earnings are taxed.
Tax rates on fixed deposit interest
The interest earned on fixed deposits is subject to tax as per your income tax slab. According to current income tax rules, the Tax Deducted at Source (TDS) on fixed deposit interest is 10% if your interest income exceeds Rs 40,000 in a financial year. The bank deducts this TDS at the time of crediting the interest to your account.
However, the actual tax liability may differ based on your income tax slab. For example, if you fall under the highest tax bracket of 30%, you will have to pay an additional tax of 20% on your FD interest income.
It is advisable to provide your Permanent Account Number (PAN) to the bank to avoid a higher TDS deduction of 20% on your FD interest income. You should also consider options like tax-saving fixed deposits that offer tax benefits under section 80C of the Income Tax Act. The interest earned and maturity proceeds from tax-saving FDs are exempt from tax up to Rs 1.5 lakh per financial year. This tax benefit is available only if an individual follows the old tax regime.
Steering clear of automatic TDS deduction: The power of forms
The good news is that even if you fall outside the exemption category, you can still claim freedom from TDS. By submitting the appropriate forms to your bank, you can opt out of the automatic TDS deduction:
- Form 15G: This form can be submitted by individuals below 60 years of age. It is a self-declaration that your tax liability for the financial year will be nil. Banks will not deduct TDS on the FD interest if you submit Form 15G.
- Form 15H: For senior citizens aged 60 years and above, Form 15H needs to be submitted. It is also a self-declaration that your tax liability will be nil for the financial year. On submission of Form 15H, banks will not deduct TDS on the FD interest.
Both forms can be downloaded from the Income Tax website and submitted to your bank before the first interest payment for the financial year. If tax is deducted at source, you can claim a refund by filing your income tax returns.
Understanding the numbers: A case in point
To understand TDS on fixed deposit interest, let us consider an example. Suppose you open a fixed deposit of Rs 5,00,000 for 5 years and the fixed deposit account interest rate is 7% compounded annually. Say you have opted for yearly interest credits. In this case:
- At the end of the first year, the interest earned will be Rs 35,000 (Rs 5,00,000*7%)
- The bank will deduct TDS at 10% on the interest earned, which comes to Rs 3,500 (Rs 35,000*10*)
- The net interest credited to your account will be Rs 31,500 (Rs 35000-3500)
The same process is repeated for the remaining 4 years. The TDS amount deducted every year is based on the interest earned for the particular year.
The bottom line
While understanding how tax on fixed deposit interest works may seem complicated at first, with some research and planning you can enjoy good returns from your investment. The key is starting early – open an FD today to let your money work for you.
