Finance

A Complete Guide to Tax on Fixed Deposit Interest

Fixed Deposits (FDs) are a secure investment option that offers guaranteed returns. However, the interest earned on FDs is taxable, and understanding the taxation rules is essential to avoid penalties and ensure compliance with the Income Tax Act.

Tax Treatment of FD Interest
The interest income earned on Fixed Deposits is taxable under the head ‘Income from Other Sources’. This income must be declared in your Income Tax Return (ITR) for the financial year in which it is earned. The tax on FD interest rate is determined as per your applicable income tax slab rate. For example, if your total income falls under the 20% tax bracket, the FD interest will also be taxed at 20%.

Note: There are no special tax rates for FD interest income.

TDS on FD Interest Under Section 194A

Banks are required to deduct TDS (Tax Deducted at Source) at the rate of 10% if the FD interest exceeds ₹40,000 in a financial year. For senior citizens, the threshold limit is ₹50,000. If you fail to provide your PAN details, the bank will deduct TDS at a higher rate of 20%. TDS is deducted at the time of interest payment or when it is credited to your account, whichever occurs earlier.

Tax Payment and Compliance

If your total taxable income, including FD interest, results in tax liability, the tax must be paid while filing your ITR for the financial year. If the total tax payable (including FD interest) exceeds ₹10,000, you are required to pay advance tax in instalments throughout the year.

Taxes can be paid online via the income tax portal or at authorised bank branches. Ensure you maintain proper records of tax payments for future reference. If you’re considering investing in Fixed Deposits, make sure to understand the Fixed Deposit India tax implications to effectively manage your tax liabilities.

Deductions and Forms

Deduction Under Section 80TTB
Senior citizens can claim a deduction of up to ₹50,000 on interest income earned from Fixed Deposits, savings accounts, and recurring deposits under Section 80TTB of the Income Tax Act. This deduction is available only under the old tax regime. Senior citizens should consult a tax advisor to utilise this deduction effectively while filing returns.
Submitting Forms 15G and 15H

If your total income, including FD interest, is below the taxable limit, you can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to your bank. Submitting these forms ensures that TDS is not deducted from your FD interest income. It is advisable to submit these forms at the start of the financial year to avoid unnecessary TDS deductions.

Example of TDS Deduction

Suppose you earn ₹45,000 as interest on Fixed Deposits in a financial year. Since this amount exceeds the ₹40,000 threshold, the bank will deduct TDS at 10%, amounting to ₹4,500. If your total income is below the taxable limit, you can file your ITR and claim a refund for the deducted TDS. Senior citizens earning below ₹50,000 in interest can avoid TDS by claiming the benefit under Section 80TTB or submitting Form 15H.

Conclusion

Understanding how Fixed Deposit interest is taxed helps you maximise your earnings while staying compliant with tax regulations. Be aware of the applicable tax rates, TDS provisions, and deductions like Section 80TTB to minimise tax liabilities. Submitting Forms 15G or 15H can help avoid unnecessary TDS deductions if your income is below the taxable limit.

For effective tax planning, consult a qualified tax advisor who can help you optimise your returns and ensure a hassle-free investment experience. By staying informed, you can make well-informed decisions and enjoy the full benefits of Fixed Deposits while keeping your tax obligations in check.