Indian residents consider investing in fixed deposits the safest investment option for their hard-earned money. Yet it has a cost, just like anything worthwhile. You may be aware that you must pay taxes on the interest income that you receive from investment instruments like fixed deposits, recurring deposits, bonds, etc. This information must be included in your income tax returns. So, being aware of the rate of interest on fixed deposits and the impact of taxation interest income will help you make a decision.
Taxation of the Interest Income
Fixed deposit interest is completely taxed. Add the interest income to your overall income to be taxed at the appropriate slab rates. It must be included in the income tax return under the heading “Income from Other Sources.”
For persons who are not senior citizens, banks deduct tax at source when crediting the interest income to your bank account if the amount is greater than Rs. 40,000. The barrier for senior citizens is Rs. 50,000.
So, it is essential to remember that the TDS is taken out when interest is credited rather than when the fixed deposit matures. Hence, if you keep an FD for three years, banks must deduct the TDS at the end of every year. However, with Form 15G or 15H, you can stop the bank from deducting TDS.
Calculation of Tax on the Interest Income
Since paying income tax is mandatory in India, you must file the ITR. Every year, in your ITR, sum up the interest income with the total income. When filing an ITR, unearned income must be disclosed under the heading “Income from other sources.” Make sure to check the tax bracket you are in.
The TDS (that has previously been deducted) will be then sorted out by the Income Tax Department as per the final income tax amount.
The total income earned from interest from the fixed deposits in a particular fiscal year should be involved in the total gain and taxed consequently if your bank does not subtract TDS from it.
It is not a good idea to wait to declare interest income until your FD matures when you receive the interest. This is so that you do not pay more tax because the accumulating interest could move you up to a higher tax bracket.
By looking at your Form 26AS, you can see the specifics of the TDS taken from your earnings.
Let’s use an illustration to grasp this better:
- Rahul is subject to a 20% tax rate. He holds two Rs. 1,000,000 FDs with a specific bank for three years at 6% interest. Rahul receives interest payments of Rs 6,000 from every fixed deposit in the first year, for Rs 12,000 in interest. With the rate of interest on fixed deposits that is below Rs 40,000 annually, the bank does not deduct TDS.
- Another example is Mr Das, who has an FD of Rs. 10 lakhs at a 6% annual interest rate. He collects Rs 60,000 in interest every year. On the total of Rs. 60,000, the bank deducts the TDS at a rate of 10%, or Rs. 6000. TDS should be applied at a rate of 10%.
Situations When TDS is Not Deducted
The following situations do not qualify for the deduction of TDS on interest on fixed deposits:
- In case a person is a senior citizen and his/her annual interest payments do not total more than Rs.50,000 for the particular fiscal year.
- If a person opens a fixed deposit in a post office
- Whether a person has a Foreign Currency Non-Resident (FCDR) or Non-Resident External (NRE) FD
Knowing the taxation part of the interest income is necessary if you plan to invest in fixed deposits, and this will help you to avoid breaching the law and pay the taxes as stated in the Income Tax Act of India. The information mentioned above will help you understand this aspect better to make an informed decision accordingly.