Individuals aiming to earn significant returns without any risks find fixed deposits (FDs) an ideal option. Individuals can easily open digital FD accounts and maximise their returns with most banks offering this option. Individuals prefer a long term deposit to maximise their FD returns – as high as 7.80% with renowned banks. What many do not know is that the interest income earned is taxable. Due to the same, investors delay paying the interest on time.
In this article, we understand when and how investors can pay income tax on FD’s interest income.
When and How to Pay Tax on FD Returns
- The amount invested in FDs is exempt from taxes under 80C of the Income Tax Act. FD account holders are liable to pay taxes on FD interest only. The total interest earned on FDs is added to the depositor’s total income in a financial year for tax calculations.
- Tax deducted at source (TDS) is figured on the accrued interest. The bank deducts the TDS when the interest on FDs gets credited. It is not calculated or deducted when the FD tenure gets over. For example, if an individual holds a cumulative FD with a maturity period of, say, three years, they will receive accumulated interest after completing the FD tenure, but the issuer will need to deduct TDS every year.
- TDS is deducted only if the FD investor’s income falls under a tax slab. If the total income earned in a year is lower than the minimum taxable bracket, the depositor need not pay TDS.
TDS Rates for Different Investors
- Taxpayers (non-senior citizens) earning interest above Rs. 40,000 in a financial year pay TDS @10% under section 194A, Income Tax Act, 1961. This interest income limit is Rs. 50,000 for senior citizens under Section 80 TTB.
- The TDS rate will be 20% if the taxpayer neglects to provide valid Permanent Account Number (PAN) details. The primary FD account holder will be liable to TDS for a joint FD account.
- In the case of NRI (non-resident Indian) FDs, depositors are liable to pay TDS @30% on FD returns under Section 195 of the Income Tax Act, 1961.
Let us understand this better with the help of some examples.
- Suppose the income of Mr Y falls under the tax bracket of 20%. This FD depositor opened two non-cumulative FD accounts with Rs.1 lakh for two years. The interest rate is 7%. The interest income from an FD is Rs.7000 in a financial year, and from both FDs, the interest income is Rs.14,000 The TDS will not be applicable because interest income does not exceed Rs.40,000.
- On the other hand, Mr Z opens an FD account with Rs.10 Lakh and the lock-in period is two years. The interest rate is 7%. The FD return is Rs.70,000. The bank will deduct TDS @10% on the interest amount before crediting it to the FD account at maturity.
Ways to Save Taxes on FD Investments
– Submit Form 15G/15H
If the depositor’s total income in a financial year does not fall under the taxable income bracket, then they can submit Form 15 G/H. Form 15H is for FD investors aged above 60 years, and Form 15G is used by non-senior citizens. They need to submit these forms at the start of the financial year if a TDS deduction is not applicable. Despite submitting the application form, if TDS has been deducted, depositors can file Income Tax Return (ITR) and claim a refund.
– Laddering
Depositors can split the investable amount into more than one FD account with different maturity dates. Distribute the funds in such a way that the interest income is not above the upper cap for fixed deposit tax exemption, i.e., Rs.40,000 for depositors falling under the non-senior citizen category and Rs.50,000 for senior citizens.
– Tax-Savings FDs
If financial goals allow, investors can open tax-saving FD accounts with a lock-in period of five years for fixed deposit tax exemption. Depositors can claim a maximum deduction of Rs.1.5 lakhs in a financial year.
Thus, bank fixed deposits are an all-time favourite investment to earn attractive returns and tax advantages make them more appealing. Using an online FD calculator, depositors can estimate their interest income on long-term deposit accounts or short-term deposits beforehand and plan for tax payments.
