How to Calculate & Pay Income Tax on Interest on Fixed Deposit?
Fixed Deposits (FDs) are a great way to save money and potentially reduce your taxes. You can use FDs to take advantage of Section 80C, which allows you to deduct up to INR 1.5 lakhs from your taxable income. This means you'll pay less tax. Plus, FDs are generally safe investments, which means your money is protected.
However, it's important to remember that the interest you earn on FDs is taxable. This means you'll need to pay income tax on the interest income. Many investors forget to do this, so we'll cover the details in this article.
Table of Content
What is a Fixed Deposit?
A fixed deposit is a large amount of investment with a fixed maturity tenure. It can be opened with any bank or financial institution. A safe investment with a predetermined interest rate that is higher than a savings account. Since the investment period is fixed no premature withdrawals are accepted. It is called term deposits.
What is TDS on Fixed Deposit?
To collect tax from individual tax income sources is known as TDS. TDS on fixed deposit refers to a mechanism by which a bank deducts a certain amount of tax from interest income earned on a fixed deposit before crediting it to the depositor’s account.
The bank usually deducts Tax Deducted at Source (TDS) from your fixed deposit interest and sends it to the Income Tax Department on the due date. You can claim a credit for the TDS deducted when you file your income tax return by submitting Form 26AS or your TDS certificate.
Interest earned from fixed deposits is fully taxable under the Income Tax Act. It's classified as "Income from Other Sources" when you file your income tax return. The interest is taxed according to your income tax bracket, along with any applicable surcharge or cess.
How is TDS on FD calculated?
The calculation of TDS on FD is based on the following factors-
Applicable TDS rate
The TDS rate for FD interest is 10% for the resident individuals. But if the depositor has not submitted PAN, the TDS rate increases to 20%. For nonresidents, different rates apply based on tax status and applicable tax treaties.
Threshold amount
TDS is applicable if the total interest income from all the fixed deposits increases the threshold amount during a financial year. Currently, the threshold is INR 40,000 for individuals and INR 50,000 for senior citizens.
For the TDS calculation, follow below given steps-
Check total interest income: In this add the interest income earned from all fixed deposits. In the particular bank during a financial year.
Check if a threshold is exceeded: TDS is applicable if the total interest income exceeds the applicable threshold
Calculate TDS amount: Multiply the total interest income that exceeds the threshold amount. Through applicable TDS rate. The TDS amount result will be deducted.
Example 1:
Aditi falls in the 10% tax bracket. She has two fixed deposits of INR 1,50,000 each, with a bank for a period of 2 years at 5.5% interest per annum. In the first year, Aditi’s interest income is INR 8,250 (INR 4,125 from each FD). Since the total interest earned is INR 8,250, and the bank doesn’t deduct TDS for FD interest below INR 50,000, Aditi will need to include this in her total income and pay tax accordingly.
Example 2:
Mr. Rajat has a fixed deposit of INR12 lakh at an interest rate of 5.8% per annum. He receives an annual interest of INR 69,600. The bank deducts TDS on the entire INR 69,600 at the rate of 10%, which amounts to INR 6,960. Rajat will need to add the remaining interest income to his total income and pay any additional taxes based on his applicable tax slab.
TDS on Recurring Deposits
Recurring deposits refer to the amount payable at regular intervals. Like an RD of INR 5,000 per month. Interest on RD is taxable as per the slab. But for senior citizens interest income from the RDs is to INR 50,000 per annum is exempted. The TDS provisions on RDs are the same as on FDs. TDS is deducted on RDs if interest is payable for them in single bank is more than INR 10,000.
Situation in which TDS is not required to be deducted
The TDS on interest is not deducted in the following cases-
If you are a senior citizen and the total interest amount does not exceed INR 50,000 during the financial year.
You have opened a fixed deposit in a post office
If you have non-residential external and foreign currency nonresident.
When is Tax on Interest Income Payable?
If there is tax liability on adding interest income to the total income, then the same is required to be paid when filing an income tax return. If your total income, including interest income, results in a tax liability, you must pay this tax when you file your income tax return for the financial year.
However, if the tax payable after adding your interest income to your total income exceeds INR 10,000, you are required to pay Advance Tax. This means you must make quarterly payments of advance tax in installments.
Important points to keep in mind
If you don't provide your Permanent Account Number (PAN) to the bank, they will deduct Tax Deducted at Source (TDS) from your fixed deposit interest at a higher rate of 20% per year.
If your total income is less than INR 2.5 lakh but the interest from your fixed deposits exceeds INR 40,000, and you've submitted the required form to the bank, no TDS will be deducted from your interest income. Tax deduction at source is not allowed if your total income is less than INR 2.5 lakh.
To prevent the bank from deducting TDS from your interest income, you should submit Form 15G or Form 15H to the bank at the beginning of each financial year.
Senior citizens can enjoy a tax exemption of INR 50,000 per year on interest earned from fixed deposits under Section 80TTB.
For Non-Resident Ordinary (NRO) fixed deposits, Tax Deducted at Source (TDS) is charged at a rate of 30%.
However, Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) fixed deposits are tax-free, so no TDS is charged.
Tax Deducted at Source (TDS) is not applicable on Time Deposits (FDs) or Recurring Deposits (RDs) made with the post office.
How to Save Tax on Income from Fixed Deposits?
You can save tax on income from fixed deposits in two ways-
To open fixed deposits with family members' names to avoid the tax burden of interest on taxpayers.
Fixed deposits are made at the right time of the year. The middle or close to the end of the year can reduce the tax distribution burden.
When the Bank Deducts TDS at 10%?
The bank calculates the interest income for the year. From all the FDs with the bank. A 10% deduction is there if the income exceeds INR40,000
The threshold limit is there to make the TDs on FDs as mentioned in the table below-
Interest paid | Threshold limit(in INR) | |
Senior citizens | Other Persons | |
Co-operatives business | 50,000 | 40,000 |
Co-operatives in the banking business | 50,000 | 40,000 |
Primary Agriculture Credit Society | 50,000 | 40,000 |
Co-operative land mortgage bank | 50,000 | 40,000 |
Co-operative Land Development Bank | 50,000 | 40,000 |
FAQs
Q1. What is tax payable on FD interest?
FD interest will get taxed according to income tax slab rates. In case you are at a low slab rate, you pay less tax. But if you are in the highest slab, you need to pay tax in addition to the deducted tax by the bank.
Q2. Will I be able to get FD interest without TDS if my income is below the taxable limit?
If your income is below the taxable limit, you can claim your fixed deposit (FD) interest by submitting Form 15G to the bank. Senior citizens can submit Form 15H for the same purpose.
Q3. When do banks or post offices deduct tax or TDS?
Banks or post offices deduct tax on TDS when the aggregate income on fixed deposits increases INR 40,000 per financial year. The limit is INR 50,000 in the case of senior citizens.
Q4. What is the tax deduction on FD interest for senior citizens?
Senior citizens can claim a tax deduction of INR 50,000 on FD interest income. During the filing of income tax returns.
Q5. What is the TDS rate on FDs?
FD interest income attracts 10% and 20% TDS. If PAN details are not provided to the bank.
Q6. Can I claim a deduction for the interest income earned from fixed deposits?
No, income tax does not provide a deduction on FD interest.
Q7. Should NRIs pay tax on Fixed Deposit interest in India?
Yes, NRIs should pay the tax on fixed deposit interest in India. However, the tax treatment is different based on their residential status and DTAA agreement.
Q8. What is the minimum tax on fixed deposits?
The minimum tax deposit on FDs is 10%. This tax rate is earned on fixed deposits. If the interest is beyond INR 40,000 during the financial year. For senior citizens, TDS is INR 50,000.
Q9. Can TDS on fixed deposits be avoided?
Yes, fixed deposits on TDS can be avoided by submitting forms 15G and H. If the total income for the financial year is below the table limit. These forms declare that you don't expect any tax during the current financial year. By submitting these forms, you can avoid TDS deducted from the interest income.
Q10. When is tax deduction at source chargeable in case of fixed deposit?
Tax is not applicable if the interest earned from a fixed deposit in a year is less than INR 40,000. However, if the interest income exceeds INR 40,000, the bank or financial institution will deduct Tax Deducted at Source (TDS) from the depositor's interest. The TDS rate is 10% per year if you provide your PAN details and 20% if you don't.
Q11. Which FD is tax-free in India?
A tax-saving fixed deposit, which typically has a lock-in period of five years, is a great option if you want to reduce your tax liability. You can claim up to INR1.5 lakh per year under Section 80C of the Income Tax Act.
Q12. How to ensure zero TDS deduction by the bank?
Taxpayers need to declare their income below the basic exemption limit using forms 15G and H. Under this provision, apply for the lower or zero tax deduction rate certificate using form 13 which registers the income for zero TDS.
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