A Complete Guide to Tax on Fixed Deposit Interest

Fixed Deposits (FDs) are a secure investment option that provides guaranteed returns on your investments. However, it’s important to be aware of the tax implications on the interest earned from FDs. The Income Tax Act imposes certain rules regarding the taxation of FD interest, and failing to comply with these regulations can lead to penalties or fines for late payment. Therefore, understanding the tax obligations associated with FD interest is essential to avoid any issues.

Tax Liability on Fixed Deposit Interest 

• Taxability of FD Interest Income:

There is no tax exemption on the interest income earned from your Fixed Deposits (FDs). The interest earned must be reported under the 'income from other sources' section in your tax filings and is considered taxable income for the financial year.

The tax rate applied to FD interest is typically a flat rate, which may differ from the tax rates applied to other sources of income. For example, if an individual falls under the 20% tax bracket, they will be required to pay 20% tax on the FD interest. For more detailed information on FD taxation and to explore related investment options like PPF and NSC, refer to our separate articles on these topics.

• TDS on FD Interest as per Sec 194 A:

Banks must deduct TDS at a rate of 10%, where the depositors’ FD interest income goes beyond 40,000 INR during a single financial year. For senior citizens, the threshold on TDS goes up to 50,000. Such TDS is paid to the government on behalf of the depositor. In the case of banks, the TDS is lowered to 20%, imposed on the depositor, if the PAN number has not been supplied. 

Tax Payment and Compliance

If your total income (which includes FD interest income) results in a tax payable amount, this must be cleared up while submitting the assessment for the financial year. Taxes can be paid within a few hours on the Internet or through authorised bank branches. Records should be kept properly, and payments should be noted down as well. 

If total liability on tax, post submission of FD interest income avails above the figure of 10,000 INR, advance tax payments are expected, and such payments are made through the year’s quarters. 

Deductions and Forms  

• Deduction Under Section 80TTB: 

Senior citizens can claim a deduction of up to ₹50,000 on interest earned from Fixed Deposits, Savings Accounts, and Recurring Deposits under Section 80TTB. This deduction applies to those filing taxes under the old tax regime.  

• Submitting Forms 15G and 15H: 

Individuals with a total income below the taxable threshold can submit Form 15G (for individuals under 60) or Form 15H (for senior citizens) to their bank to prevent TDS deductions on FD interest. These forms should ideally be submitted at the start of the financial year to avoid unnecessary deductions.

Conclusion  

Understanding the taxation rules on FD rates is crucial for maximising returns while minimising tax liabilities. Being informed about your obligations, such as exemptions, required documents, and compliance forms, ensures a smooth investment experience. 

Seeking advice from a tax consultant is advisable for tailored strategies and filing returns that suit your financial situation. With a clear understanding of Fixed Deposit income in India and its taxation, you can make informed investment decisions and achieve your financial goals with confidence.