Fixed Deposits (FDs) are a popular savings tool in India. They offer guaranteed returns over a fixed tenor. However, the interest income from FDs is subject to taxation under the Income Tax Act, 1961. It is added to your total income and taxed according to your income slab. Let’s break down how this works.
Tax Deducted at Source (TDS)
Banks and NBFCs deduct TDS on FD interest if the interest exceeds ₹40,000 in a financial year. For senior citizens, the limit is ₹50,000. The TDS rate is 10% if the PAN is provided. If the PAN is not provided, the TDS rate is 20%.
Example
If you earn ₹45,000 in interest from an FD in a year and have provided your PAN, the bank will deduct ₹4,500 (10%) as TDS.
Income Slab Rates
The interest earned from your FD is added to your total yearly income. It is then taxed based on your income slab. The income slabs are:
- Up to ₹2.5 lakh: No tax
- ₹2.5 lakh to ₹5 lakh: 5%
- ₹5 lakh to ₹10 lakh: 20%
- Above ₹10 lakh: 30%
Example:
If you are in the 20% tax slab and your FD interest is ₹50,000, you will owe ₹10,000 in taxes on that interest. If TDS of ₹5,000 was already deducted, you need to pay an additional ₹5,000.
Filing Tax Returns
Even if TDS is deducted, you must report the interest income in your Income Tax Return (ITR). You may need to pay additional tax or claim a refund based on your total taxable income.
Example
If your total income falls into the 20% tax slab, you will owe an additional 10% tax on the FD interest. This is over and above the TDS already deducted.
Strategies for Optimising FD Taxation
While you cannot avoid paying taxes on FD interest, you can use strategies to optimise it.
Spread FDs Across Financial Years
Invest in FDs that mature in different financial years. This helps you avoid crossing the TDS threshold in a single year.
Example
Instead of one FD of ₹10 lakh maturing in one year, invest in two FDs of ₹5 lakh each, maturing in different years.
Distribute FDs Among Family Members
Invest in FDs in the names of family members who are in lower tax brackets. This reduces the total tax liability.
Example:
If your spouse or child is in a lower tax bracket, you can invest a portion of your funds in their name.
Submit Form 15G or 15H
If your total income is below the taxable limit, submit Form 15G to the bank. Senior citizens should submit Form 15H instead. This prevents the bank from deducting TDS.
Example
If your total income is ₹2 lakh and your FD interest is ₹30,000, submitting Form 15G will ensure no TDS is deducted.
Using an FD Tax Calculator
An FD tax calculator helps estimate the tax on your FD interest. These tools are available on many banking and financial websites. You enter the FD amount, interest rate, and tenor. The calculator then provides the taxable interest and TDS amount.
Example
If you invest ₹5 lakh in an FD with a 6% p.a. interest rate for one year, the calculator will show the interest earned. It will also display the TDS deducted and the net interest received.
Importance of Accurate Reporting
It is crucial to report all FD interest income accurately in your ITR. Failure to do so can result in penalties and legal issues. Keep track of interest earned from all FDs. Include interest from different banks and NBFCs.
Example
If you have FDs in three different banks, ensure you include the interest income from all three in your ITR.
Senior Citizens and FD Taxation
Senior citizens receive some benefits in FD taxation. The interest income up to ₹50,000 is exempt from TDS under Section 80TTB of the Income Tax Act, 1961. This exemption helps reduce the tax burden on senior citizens.
Example:
A senior citizen earning ₹60,000 in FD interest will have TDS deducted only on ₹10,000. This is provided they submit the required declaration.
Comparing FDs with Other Investment Options
When planning your investments, compare FDs with other options. Consider Public Provident Fund (PPF), National Savings Certificate (NSC), and Mutual Funds. While FDs offer guaranteed returns, they may not always be the most tax-efficient.
PPF and NSC
PPF and NSC are government-backed savings schemes. The interest earned on PPF is tax-free. NSC interest is taxable but qualifies for deduction under Section 80C of the Income Tax Act, 1961.
Mutual Funds
Equity Mutual Funds held for more than one year qualify for long-term capital gains tax at 10% on gains over ₹1 lakh. Debt Mutual Funds held for over three years qualify for long-term capital gains tax. They also offer indexation benefits.
Diversification for Tax Efficiency
Diversifying your investments can help optimise your tax liability. Instead of investing all your money in FDs, diversify your investments. Consider spreading your money across different financial instruments.
Example
Allocate part of your investment to PPF for tax-free interest. Place some funds in FDs for guaranteed returns. Invest the remaining amount in Mutual Funds for potential higher returns and tax efficiency.
Keeping Updated with Tax Laws
Tax laws can change, impacting how FD interest is taxed. Stay informed about the latest tax regulations to make informed investment decisions. Consult with a tax advisor or financial planner if needed.
Example
In recent years, there have been changes in TDS thresholds and tax rates. Keeping updated with these changes helps you plan better.
Conclusion
Understanding the taxation on FD interest income is essential for all FD investors. While you cannot avoid taxes, you can use strategies to optimise your tax liability. Spread your investments across different FDs. Take advantage of lower tax brackets within your family. Use forms like 15G and 15H when applicable. Use an FD tax calculator to estimate your tax liability.
Ensure accurate reporting in your ITR. Diversify your investments to include tax-efficient options like PPF and Mutual Funds. Stay updated with tax laws and seek professional advice if needed. This will help you maximise your returns and stay compliant with tax laws.
