Fixed Deposits (FDs) enable you to utilise the benefits offered by Section 80C of the Indian Income Tax Act and lessen your tax liability up to Rs. 1.5 lakh in a financial year. Not only do they provide interest returns but also ensure the safety of your capital. However, it’s important to note that the interest one receives from the fixed deposit comes under the purview of tax. Surprisingly, investors rarely consider making timely tax payments on their interest income. Continue reading to learn about the income tax on interest on fixed deposits.
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. Note that income tax on fixed deposits is calculated differently.
Banks follow a procedure called Tax Deducted at Source (TDS) when it comes to the interest income of 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 the source before crediting the interest to your account.
How Does TDS Work?
When individuals receive payments, an individual or entity making the payment must withhold a certain amount of tax before giving the money. This withheld tax is referred to as TDS, which stands for Tax Deducted at Source. TDS aims to guarantee that the government receives its share of tax revenue on time.
Now, when you receive the payment, you will actually receive the amount after deducting the TDS. 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 paid by the person or entity making the payment to the central government as their TDS obligation.
Now, 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 TDS return or 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.
You must not wait for the fixed deposits to mature, and you may actually receive the interest before reporting it as income. The reason is that the interest earned could push you into a higher tax slab, resulting in a higher tax payment.
Sometimes, the bank may not deduct TDS from your interest income. Here are the conditions:
The bank cannot take any TDS from the interest income from all of your FDs with that bank if it is below Rs.40,000 in a given year. The cap is Rs.50,000 if you are a senior citizen, at least 60 years of age.
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 deduction will be made.
- If you fail to provide the bank with your PAN (Permanent Account Number) information, they levy a 20% TDS. Therefore, ensuring your PAN details are submitted to banks is vital.
However, there are cases when TDS is not deductible, even if your interest income exceeds the specified limits:
- Zero TDS will be deducted when your total income is below Rs.2.5 lakh. This means that even if you have an interest income of Rs.40,000 or more in a financial year if your overall income is below the minimum taxable amount, no TDS will be deducted.
- The bank cannot deduct TDS when tax liability on the individual is zero. In such instances, the bank does not go for TDS deductions if you submit Form 15G or 15H to banks to claim the income from interest on FDs.
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 calendar year. It’s essential to settle any outstanding tax payments by then.
- But here’s the twist: 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. That means you must pay it all off in one go before the end of the financial year.
- So, 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 guarantee that the bank does not deduct TDS:
- The tax payable on your entire income is ‘nil’. For more information, click here.
- You must submit Forms 15G and 15H to the bank before the deadline.
Interest income from FDs is taxable, and banks follow Tax Deduction at Source (TDS) for this purpose. Pay attention to the deadline for tax payments and consider Advance Tax if the total tax liabilities exceed Rs.10,000. Certain conditions apply for TDS deduction; you can submit Form 15G or 15H to avoid TDS.