Tax on FD Interest - How Much Tax Is Deducted on Fixed Deposit

Tax on Fixed Deposit (FD): How Much Tax Is Deducted on Fixed Deposits?

Opening a Fixed Deposit (FD) Account is one of the best investment options. Apart from realising a corpus for future goals, you can also save on tax. Let's get to know how much taxable amount you can save on an FD Account.

A Fixed Deposit is safe investment option available in India. Whether you want to open in the name of a minor, adult, or senior citizen, the account helps in building a good corpus. As compared to a Savings Account, a Fixed Deposit offers a higher interest rate. The account also entitles you to avail of short-term loans in case of financial emergencies.

Often, people initiate investments to save income tax. If your preference for opening an FD Account is to claim tax deductions, then here's how you can save on FD interest income.

What is TDS?

Tax Deducted at Source (TDS) is a system implemented by the Income Tax Department to collect taxes during certain transactions. Under TDS, a specified percentage of the payment is deducted by the payer and remitted to the government as tax. TDS is deducted from salaries, interest on Fixed Deposits (FDs), professional fees and more. The deducted amount is then credited to the payee's income tax account and can be adjusted against his/her total tax liability when he/she files income tax return.

How is FD income taxed?

The interest income you earn from an FD is fully taxable. The interest earnings form a part of your total tax liability. You must also know that when you earn interest on an FD in a year, it is essentially clubbed with your annual income. Based on the total income, your tax slab is determined. Since the interest income earned on FD is considered "income from other sources," it is therefore charged under Tax Deducted at Source or TDS. When your bank credits your interest income into your account, the TDS gets deducted right at that time. Let's get to know some pointers related to tax on FD:

The bank doesn't charge tax on Fixed Deposit if your overall income is less than Rs 2.5 lakh in a year. However, some lenders may ask you to submit Form 15G or 15H to claim the deductions.
If you want to save on TDS, make sure you submit Form 15G and 15H to the bank at the beginning of the financial year to avoid additional TDS.
If your interest income from all FDs is less than Rs 40,000 in a year, the income is TDS exempt.
On the other hand, if your interest income is over Rs 40,000, the TDS would be 10%. Besides, if you do not have a PAN card, the bank can deduct 20% of TDS.

What is the purpose of Form 15G and Form15H?

Forms 15G and 15H are self-declaration forms that can be submitted to avoid Tax Deducted at Source (TDS) on specific income. Form 15G is for individuals below 60 years while Form 15H is for senior citizens (above 60 years). If the total income is below the taxable limit, these forms can be used to declare that no tax is payable. By submitting these forms, individuals can save TDS on interest income from Fixed Deposits (FDs), Recurring Deposits (RDs) and other sources ensuring they receive the full amount without tax deduction.

Let's understand the TDS on FD with the help of an example

Mr Anand has three FD Accounts with three different lenders. Bank A fetches interest earning of Rs 50,000 per annum, while Bank B helps him earn Rs 30,000 per annum and Bank C gives him an interest of Rs 20,000 per annum.

On the basis of the TDS, Mr Anand is liable to pay 10% TDS, as his interest earnings exceed Rs 40,000 in a year. The tax department doesn't consider your total interest earnings from all the banks. TDS is only on the interest amount that exceeds Rs 40,000 from Bank A. For the other two accounts, Mr Anand will get a Fixed Deposit income tax exemption.

Tax deductions on FDs for Senior citizens:

Just like elders are offered special interest rates on FDs; similarly, tax deductions are different for them. In the case of Senior citizens (60 years and above), the TDS exemption limit is Rs 50,000 under Section 80TTB of the Income Tax Act.

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