09 July 2024 | By INDIE
Fixed Deposits (FDs) are preferred investment options for many investors. This is mainly because FDs offer capital protection along with guaranteed returns. However, what many FD investors fail to consider is that the interest income earned from fixed deposits is taxable under income tax laws. You are required to pay taxes on the interest amount received annually from your bank FDs. This guide discusses all the important aspects of taxation on interest income from fixed deposits in India.
Interest income earned from fixed deposit is considered taxable income. The interest must be declared in your individual income tax returns for the financial year under the 'Income from Other Sources' category.
Even though FDs provide guaranteed returns and capital protection, you need to pay taxes on the interest amount received every year. The interest from your FDs is added to your total annual income which is then taxed as per your tax slab rates. Tax deductions available under section 80C can be claimed on the principal amount invested in the FD, but not on the interest income.
Your income tax liability depends on your marginal tax rate which can range from 0-30% based on your income slab. Senior citizens usually get higher tax deductions and therefore may fall in a lower tax bracket.
It is important to note that your interest income from all FDs with different banks is considered to calculate your total taxable income from other sources. You cannot avoid paying taxes on FD interest by opening multiple accounts with small amounts if your cumulative interest exceeds the basic exemption limit. Failing to declare FD interest can attract penalties as it is subject to audit by the income tax department.
When it comes to the deduction of tax FD interest, banks follow the procedure of Tax Deducted at Source or TDS. As per the TDS mechanism, tax is deducted at the time of crediting interest into the depositor's account instead of waiting for the individual to file income tax returns and pay taxes.
Generally, banks deduct a TDS of 10% of the interest amount if it exceeds the threshold limit. For residents below the age of 60 years, this threshold is ₹40,000 annually. For senior citizens, who are residents aged 60 years and above, the threshold limit for TDS deduction is ₹50,000 per year.
The rate of TDS on interest on fixed deposits is higher at 20% if the deposit holder fails to furnish their Permanent Account Number (PAN) to the bank. Providing PAN details is necessary as it helps in determining the accurate TDS to be deducted.
As per the Income Tax Act, 1961, all taxes including the taxes on FD interest must be paid by March 31st of every financial year. However, if the total tax liability including taxes on FD interest exceeds ₹10,000 for the year, then advance tax must be paid.
This means the tax amount can be paid in installments as prescribed rather than the entire sum at the end of the financial year. The bank will deduct TDS on FD interest as per rules, but it is the depositor's responsibility to ensure total taxes are paid.
There are a few exceptions when banks do not deduct TDS on interest income from FDs despite the amount exceeding the threshold limits.
● If the deposit holder's total income for the financial year is less than ₹2.5 lakh, no TDS will be applicable.
● When Form 15G/15H is submitted to the bank before June 30th declaring nil tax liability for the year on interest income. The forms are meant for senior citizens and residents below 60 years of age respectively.
● TDS may also not be deducted if the interest income is earned on a joint deposit account and the primary holder's income is below the taxable limit.
So, in these cases, the banks do not enforce TDS rules.
It is important for FD investors to be aware of their tax obligations regarding interest income earned through fixed deposits. Proper planning and compliance with income tax rules are necessary to ensure taxes are paid on time and penalties are avoided.
Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.
