Fixed Deposits (FDs) allow you to deduct Rs 1.5 lakh from your taxable income under Section 80C. As well as providing capital protection, it also pays some interest. It is, however, taxable to earn interest on a fixed deposit. Interest income is rarely taxed on time by investors. income tax on fd interest income will be discussed in this article.
How is interest income taxed?
The interest income from Fixed Deposits is fully taxable. Get taxed at the slab rates applicable to your total income when you add it to your total income. Income from other sources should be reported on your income tax return under the heading ‘Income from Other Sources’.
Unless you are a senior citizen, banks deduct tax at source when crediting interest to your account. (For senior citizens, the threshold is Rs.50,000).
So, it is important to remember that TDS is deducted when interest is credited, and not when the FD matures. So, if you have an FD for three years, the bank will deduct TDS every year. Please see below for more information about TDS on FDs.
Understanding TDS:
Taxes must be deducted by the person paying you when you receive certain payments. The Central Government receives this tax deducted at source, called TDS.
The amount will be credited to your account net of taxes. When filing your income tax return, you must include the gross amount. In contrast, TDS can also be credited against tax liability or refunded when no tax liability exists.
For an example, if you earn FD interest of Rs.100, the bank will deduct 10% TDS i.e. Rs.10 and deposit it to the government. In the ITR, you must include the entire interest earned of Rs.100 and claim the TDS of Rs.10 from the outstanding liability or the TDS refund deducted by the bank.
How to calculate tax on interest income?
Your income tax return should include interest income each year (even if it is not paid out). Income from other sources must be reported under the ‘Income from other sources’ section of the ITR. Find out what tax slab you are in.
Tax deductions (which have already been deducted) will be adjusted against your final tax liability by the Income Tax Department.
Interest income earned from fixed deposits that is not taxed by the bank must be added to your total income and taxed.
It is not recommended to wait until the maturity date of your FD to report interest income. The accumulated interest may push you up to a higher tax slab and you may end up paying a higher tax.
You can view the details of TDS deducted on any of your income by viewing your Form 26AS.
Let’s understand this by way of an example:
The tax bracket for Ritwik is 20%. There are two Fixed Deposits with a bank worth Rs 1,00,000 each for a period of 3 years at 6% interest. During the first year of operation, Ritwik earns 6,000 rupees from each FD, totaling 12,000 rupees in interest income. For interest on FDs below Rs 40,000, the bank does not deduct TDS.
As another example, Mr. Anurag has a fixed deposit of Rs 10 lakh at an interest rate of 6% per year. Each year, he receives 60,000 rupees in interest. Using the 10% TDS rate, the bank deducts Rs 6000 from Rs 60,000. Generally, TDS is 10%.
When to pay tax on interest income?
A tax liability on interest income needs to be paid on or before 31st March of the financial year, if there is one. If you owe tax, here’s how to pay it.
In the event that your tax payable after including your interest income in your total income exceeds Rs.10,000, then you are liable to pay Advance Tax. There is therefore a need to develop rules for quarterly installment payments of advance tax.
Understanding TDS in relation to FDs
When does the bank not deduct TDS:
In a year, the bank cannot deduct TDS if your interest income from all FDs is less than Rs 40,000. For senior citizens 60 years and older, the limit is Rs 50,000.
Prior to Budget 2019, the limit of TDS on interest income was Rs. 10,000.
When does the bank deduct TDS @ 10%
Based on all the FDs you have with the bank, the bank estimates your interest income for the year. Your interest income over Rs 40,000 would be subject to a 10% TDS deduction (Rs 50,000 for senior citizens). Interest income was subject to TDS up to a limit of Rs. 10,000 prior to Budget 2019.
When does the bank deduct TDS @ 20%:
Without your PAN information, the bank will deduct 20% TDS. Don’t forget to provide your PAN details to the bank.
When your overall income is less than Rs. 2.5 lakh
If your total income is less than the minimum taxable amount, you are not entitled to deduct TDS. For FY 2019-20, the minimum exempt income is Rs 2.5 lakh and some investors have more than Rs 40,000 interest income in a year.
The bank cannot deduct TDS when there is no tax to be paid by the individual. If you submit Form 15G or 15H to claim interest income without TDS, the bank will not deduct TDS.
How to ensure zero TDS deduction by the bank
If your total income is not subject to tax and you submit Form 15G and Form 15H to the bank before the due date, no TDS will be deducted by the bank.
To avoid additional TDS deductions and subsequent refunds from the IT Department, submit these forms every year at the beginning of the financial year.
Interest from FD for senior citizens
Tax deductions of up to Rs 50,000 are available to senior citizens who receive interest income from FDs, savings accounts, and recurring deposits. In accordance with Finance Act 2018, this amendment has been made.
You can read the detailed article on this here, which discusses provisions of section 80 TTB. Banks cannot deduct TDS on interest income from FDs held by senior citizens if their total interest income is less than Rs 50,000 in a year.
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