When & How to Pay Income Tax on Fixed Deposit (FD) Interest Income?

Certain Fixed Deposits (FDs), specifically tax-saving FDs, enable you to avail tax benefits under Section 80C of the Indian Income Tax Act, which can lessen your tax liability up to Rs. 1.5 lakh in a financial year. They not only provide interest returns but also ensure the safety of your capital. However, it’s important to note that the interest earned from fixed deposits is subject to tax. However, investors sometimes overlook making timely tax payments on their interest income. Continue reading to learn more about income tax on FD interest income.

Tax Calculation for Interest Income

Interest income from FDs is subject to taxation. It is considered part of your annual income and is taxed based on the applicable slab rates for your overall income. You need to include this income under the ‘Income from Other Sources’ category in your ITR to report it. The collection of this tax often involves Tax Deducted at Source (TDS).

Banks follow a procedure called Tax Deducted at Source (TDS) for interest income from FDs. If the interest you earn exceeds Rs. 40,000 (for taxpayers who are not senior citizens) or Rs. 50,000 (for senior citizens), the bank will deduct tax at source before crediting the interest to your account.

How Does TDS Work?

When an individual or entity makes a payment, they must withhold a certain amount of tax before disbursing the money. This withheld tax is referred to as Tax Deducted at Source (TDS). TDS aims to ensure the government receives its share of tax revenue on time.

When you receive the payment, you will receive the net amount after TDS deduction. So, let’s say you were supposed to receive Rs. 2,000, but 10% TDS was deducted, which amounts to Rs. 200. In this case, you would receive only Rs. 1800 (Rs. 2,000 – Rs. 200). The deducted amount of Rs. 200 is then deposited by the person or entity making the payment (the deductor) to the central government as their TDS obligation.

While filing your income tax return, you must report the gross income you earned before any deductions, including the TDS. In this example, you would report an interest income of Rs. 2,000.

At the same time, you can claim the TDS amount of Rs. 200 that was deducted by the bank as a credit against your total tax liability, depending on the situation. If you have a tax liability (meaning you owe taxes), the TDS amount can be used to offset that liability. Otherwise, if you have no tax liability, you can claim a refund of the TDS amount from the government.

It’s important to remember that tax on FD interest income is typically calculated on an accrual basis or when received, whichever is earlier. Therefore, you should account for and pay tax on the interest earned in each financial year, even if the FD has not yet matured. Delaying this could lead to a significant tax burden in a single year, potentially pushing you into a higher tax bracket and resulting in higher tax payments or penalties.

Read more: Fixed Deposit or Debt Mutual Fund, Which One is Better for You?

TDS Related to Fixed Deposits

Sometimes, the bank may not deduct TDS from your interest income. Here are the conditions: 

The bank will not deduct TDS from the total interest income from all your FDs with that bank if it is below Rs. 40,000 in a given financial year. For senior citizens (individuals aged 60 years or more), this threshold is Rs. 50,000.

On the other hand, the bank will deduct TDS under the following circumstances:

• The bank evaluates your interest income for the year from all the FDs you have with them. If this interest income crosses the threshold of Rs. 40,000 (or Rs. 50,000 for senior citizens), a 10% TDS will be deducted. 
• If you fail to provide the bank with your PAN (Permanent Account Number) information, they will deduct a 20% TDS. Therefore, it is vital to ensure your PAN details are submitted to banks.

However, there are cases when TDS is not deductible, even if your interest income exceeds the specified limits:

• When your total income for the financial year is below the basic exemption limit (e.g., Rs. 2.5 lakh for individuals below 60). In such cases, even if your FD interest income exceeds the TDS thresholds, you can prevent TDS deduction.
• When your tax liability on your total income is zero, and you submit Form 15G (or Form 15H for senior citizens) to the bank. These forms declare that your total income falls below the taxable limit, and therefore, no tax is payable. 

When should you pay tax on interest on a fixed deposit?

• You must pay the tax against the interest earned from FDs by March 31st of the financial year. It’s essential to settle any outstanding tax payments by then.
• However, if the total tax you owe, including the taxes on the interest income, amounts to Rs. 10,000 or more, you’re required to pay Advance Tax. This involves paying your estimated tax liability in installments throughout the financial year, as per the prescribed due dates, rather than a lump sum at the year-end. 
• It’s crucial to stay on top of your taxes and make the necessary payments to avoid any complications down the line.

You must fulfil two requirements to ensure that the bank does not deduct TDS:

• Your estimated tax liability on your total income for the financial year is ‘nil’. For more information, click here. 
• You must submit Forms 15G and 15H to the bank before the deadline.