TDS on Fixed Deposits

Along with the assurance in capital protection, a Fixed Deposit (FD) awards you some extra income in the form of interest. However, the interest accrued on Fixed Deposit (FD) is taxable in India. The FD interest is an excellent source of earning for you, and you must learn how to protect it.

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This article will shed light on the various aspects of income tax on fixed deposits. Before that, let us clear some air around what is TDS?

What is TDS?

TDS is the short form of is Tax Deducted at Source. It is a special kind of tax aimed to collect tax straight from the source of your income under the Indian Income Tax Act, 1961.  

According to the Income Tax Department, this type of tax is deducted at the source to remit the amount directly into the account of the Central Government. This tax is deducted in advance when the income is credited to an individual to avoid tax fraud. The First Schedule of the Finance Act explicitly mentions the rates for deducting TDS. 

How is FD Interest Income Taxed? 

FD interest is taxed as per the following cases:

  1. TDS on the Interest Earned on an FD

    The interest earned on an FD is added to your total income. So you will be taxed at slab rates on your total income. It should be noted that banks deduct the tax when your interest is credited and not when your FD matures. 

    For instance, if your FD matures three years from now, the payer is required to deduct TDS at the end of every financial year. 

  2. Taxable Interest Income

    According to new tax law, if your interest amount is beyond Rs. 40000 in a year, you will have to pay TDS on a fixed deposit. It is applicable for all except for elderly people who have crossed 60. For them, the threshold amount prescribed is Rs. 50000. The TDS on interest income was limited to Rs. 10000 before the 2019 budget. 

  3. Procedure to Calculate TDS on an FD

    The TDS on fixed deposit interest is calculated for individuals based on the tax slab they fall into. Let's look at an example to see things closely. 

    Suppose Ajay owns two FDs of Rs 2 lakhs each. He earns 10% interest on the FDs for 3 years. Then, the interest amount per year would be 40000(20000+20000). The total interest amount in 3 years would be Rs. 40000*3 or Rs. 120000. So at a 10% rate, Ajay's TDS will be 10%of Rs. 40000 = 4000. 

Different Rates of TDS

TDS rates vary from customer to customer. Here are the details:

  1. For Indian Residents 

    According to the financial budget 2020-2021, banks can automatically deduct TDS on the interest of an FD at a 10% rate per year. 

  2. For NRIs

    Under Section 195, Non-Resident Indians have to pay TDS at the rate of 30% plus surcharges on FD interests.

Rules and Regulations of TDS on FD

According to current TDS rules, these few points are significant to remember:

  • The deductor is required to provide a TDS certificate or Form 26A to the deductee.  

  • 20% TDS will be charged if you are unable to produce authentic (Permanent Account Number) PAN information.

  • As per Income Tax Act, 1961, if the interest income on FD exceeds Rs. 5 lakh, the extra tax will be charged at a 10% rate in addition to TDS. 

  • Similarly, FD interest over 10 lakh is liable for an extra 20% tax deduction along with the TDS.

  • Your bank can not deduct any kind of tax or TDS on FD if the total income, including FD interest, falls under the exemption limit. 

  • Even though you have more than Rs. 40000 interest income a year, no TDS can be deducted from you if the total income, including that interest income, lies below exempt income, i.e., Rs. 2.5 lakh. 

  • A tax saver FD can also be a part of the TDS deduction.

How Can You Save TDS on FDs or Get Back a Refund?

You can save tax as per the following:

  • Form 26AS contains particulars on your tax expenditure. You can also look for TDS details deducted from your FD interest in this form. As a tax-conscious citizen, you must cross-check your Form 26AS to ensure no confusion remains. 

  • If you find out you have paid an additional amount of TDS to the government, you can always seek a refund by reporting your income tax returns. You have to report the gross interest amount under the head ‘Income from Other Sources’ while filing your Income Tax Return.  

  • Likewise, you can also file your income tax returns and ask for refunds if you fall in the no-income-tax slab, and yet you are charged with tax deducted on your FD.

  • At the beginning of a financial year, you can submit Form 15G as a declaration that you have earned a total below 2.5 lakh annually. Therefore, you must be exempted from paying TDS on FD interest. 

  • Form 15H serves a similar purpose. Only it addresses the exemption issues of senior citizens. If you are a senior citizen and earn less than 3 lakh, submit this form to avoid unfair TDS and to get a subsequent refund from the Income Tax Department. 

Areas of TDS Exemption

You should take into account the following details if you are looking for a TDS waiver. These are a few exemption limits:

  • No TDS will be deducted if your taxable income rests below 2.5 lakh.

  • According to an amendment vide Finance Act 2018, senior citizens have the relaxation up to Rs. 50000 annually in income tax deduction.

  • If you are above 60 years of age and your total income falls below INR 3 lakh per annum, you are exempted from paying any kind of TDS. 

  • In a particular financial year, no more than Rs. 5000 can be deducted for all the citizens.

How to Reduce TDS on FD?

Here are some easy ways that you can follow to reduce TDS-

  • You can think of creating your FD at a post office instead of a bank. In a post office FD, you need to pay much less money on TDS than a regular bank FD. Though the FD rate is lesser at the post office, you can save more on taxes.

  • Open your FD accounts in different banks or institutions. It can save you some tax money since the sources are not adjoining. 

  • It may be possible to minimize your taxes if you open FD accounts in the name of non-earning members of your family. 

In Conclusion

 Do not wait for your FD maturity period to report your interest income. Check annually whether your TDS is deducted correctly. You should take this seriously. Otherwise, the accumulated interest may cost you more tax by amplifying your tax slab rate.

Past 5 Year annualised returns as on 01-05-2024

^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The lumpsum benefit is calculated if policyholder invested ₹10000 monthly for 10 years in the fund with a policy term of 20 years. This Point To Point past performance data of last 10 years has been used to illustrate a scenario for the customers benefit. It is assumed that the past 10 years returns would have also been delivered in last 20 years. This is not guaranteed and not in anyway indicative of what the customer may actually get 20 years from now. The investment is subject to market risk and the risk is borne by the policyholder.

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