Understanding tax implications on your investments on bank FD

Fixed deposits, being secure and liquid are one of the most famous forms of savings. They are an excellent way for you to protect savings from inflation and also provide low-risk returns. However, the income earned from FD is taxable and added to your total income for taxability purposes. 

How is interest on FD taxed?

The interest earned on FD is taxable under the head ‘income from other sources’.

For calculating tax, interest on FD is added to the total income of the taxpayer and tax is calculated as per the income tax slabs applicable. 

When is TDS deducted on the interest of FD?

Banks deduct TDS on fixed deposit interest at the time of crediting the interest amount to the FD holders account. Please take note that TDS is deducted every year when the interest is accrued/earned and not when interest is received after the period of FD matures. This amount forms a part of your total tax liability.

The bank will deduct the TDS at 10% of the interest amount if the total interest income is more than Rs 40,000 for individuals and Rs 50,000 for senior citizens. This amount has increased from Rs 10,000. TDS deducted is 20% if PAN is not provided to the particular bank. The payee can then adjust this TDS against his total tax liability or even claim a refund if the amount of TDS deducted is more than his total tax liability.

Let us understand this with an illustration:

• Mr Rahul has a salary income of Rs 13 lakh p.a.
• FD I – Fixed deposit for four years with Bank A. Accrued interest on this FD is of Rs 50,000 per annum.
• FD II – Interest of Rs 30,000 from bank B.

Total income = Rs 13.80 lakh (Salary + FD interest I + FD interest II). Here, interest income is added to the gross total income of Rahul. As he falls under the slab rate of 30% already, FD interest will be chargeable at 30% tax. 

However, bank A will deduct TDS at 10% of Rs 50,000, i.e. Rs 5,000 every year though actual interest will be credited to the account at the end of four years. This TDS amount gets adjusted against final tax liability. 

Also Read: Flexi Deposits vs Fixed Deposits: Which One Suits You?

What if your total income falls under the basic exemption limit?

If your total income is below the basic exemption limit of Rs 2,50,000, then you are not liable for the tax. In this case, to avoid TDS deductions by a bank, you are required to submit form 15H and 15G at the beginning of every financial year.

Form 15G – Individuals who are below 60 years of age, can submit Form 15G to their financial institutions if their total income of the year is below the basic exemption limit.

Form 15H– This is to be submitted by senior citizens who does not have a tax liability in that year.

It is, however, essential to submit both these forms at the start of the year, If you fail to submit these forms and the banks have deducted the TDS from your interest, you can claim a refund for the same at the time of filing the income tax return.

Tax benefits under 80C investment in fixed deposits

An individual can claim deduction up to Rs 1,50,000 in a financial year under Section 80C of the Income Tax Act, 1961 for investments made in tax-saving fixed deposits. The amount so invested is deducted from total gross income to arrive at the net taxable income. However, these deposits will have a lock-in of five years, and premature withdrawals are not allowed. The interest earned is subject to TDS as per the investor’s tax slab.

For any clarifications/feedback on the topic, please contact the writer at jyoti.arora@cleartax.in