How much tax is deducted on Fixed Deposits?

Fixed deposits (FDs) are popular investment instruments in India, offering a secure and predictable way to grow your savings. However, it is crucial to understand the tax implications associated with FDs. In this article, you can find the answer to how much tax is deducted on fixed deposits to help you make better financial decisions. Whether you are a first-time investor or an experienced saver, understanding the tax aspects of fixed deposits is essential for maximising your returns and managing your tax liability.

Taxation of Fixed Deposits

While you may be familiar with the concept of what an FD is and how it works, it is also essential to know the elements involved with its taxation. Here are a few crucial factors that need to be considered while studying the tax implications of fixed deposits:

Interest Income:

The interest earned on fixed deposits is considered “Income from Other Sources” and is subject to income tax. It is added to the individual’s total income and taxed according to their applicable income tax slab rate. It is crucial to factor in this taxation while evaluating the overall returns from your fixed deposits.

Tax Deducted at Source (TDS):

The Income Tax Department mandates banks and financial institutions to deduct tax at source on the interest earned from fixed deposits. There is no TDS charged in two instances:

1. No interest is charged on FDs if your overall income is less than Rs 2.5 Lakhs in a year.

2. An Individual is exempt from TDS on FDs if the cumulative interest is less than Rs 40,000 annually.

The current TDS rate is 10% for all FDs with a cumulative interest income above Rs 40,000 for individuals who have provided their PAN (Permanent Account Number) details to the bank. However, if the PAN is not available, the TDS rate is charged at 20%.

Form 15G/15H:

Individuals not liable to pay income tax can submit Form 15G (for individuals below 60 years of age) or Form 15H (for senior citizens) to the bank. These forms declare that the applicant’s total income is below the taxable limit, and no tax is payable on the interest earned from fixed deposits. Submitting these forms helps in avoiding TDS deduction on fixed deposit interest.

Understanding TDS on Fixed Deposits

To comprehend the implications of TDS on fixed deposit income, let’s explore some important aspects.

Threshold Limit:

TDS on fixed deposits is applicable when the total interest income in a financial year exceeds Rs. 40,000 for individuals and Rs. 50,000 for senior citizens. There will be no TDS deduction if your interest income remains below these threshold limits.

Exemptions and Deductions:

Individuals can claim deductions under Section 80C of the Income Tax Act to reduce taxable income. Investments made in specified schemes such as Public Provident Fund (PPF), National Savings Certificate (NSC), and 5 Years Tax-Saving Fixed Deposits are eligible for deductions.

If you are a resident of India and your fixed deposit interest income exceeds Rs. 10,000 in a financial year, you can claim a deduction for the TDS when filing your Income Tax Return. To avail of this deduction, you can submit either Form 15G or Form 15H to your bank or financial institution.

By submitting Form 15G, individuals below 60 years can declare that their total income is below the taxable limit, and therefore, no tax is payable on the interest earned. This enables them to avoid the TDS deduction on their fixed deposit interest income. On the other hand, senior citizens can utilise Form 15H to declare that their total income is below the taxable limit, making them eligible to receive interest income without any TDS deduction.

By availing these deductions, you can lower your overall tax liability.

Taxable Amount:

The interest income earned from fixed deposits is added to the individual’s total income and taxed as per their applicable income tax slab rate. It is essential to accurately calculate the tax liability to ensure compliance with tax regulations. Understanding your income tax slab rate and considering the impact of fixed deposit interest on your overall income is crucial for effective tax planning.

Impact of TDS on Fixed Deposits

While TDS on fixed deposits is a mandatory tax deduction, it can significantly impact your financial situation. Let’s explore the effects of TDS on fixed deposits.

1. Cash Flow: The TDS deduction on fixed deposits can affect your cash flow, especially if you rely on the interest income for regular expenses. Considering the TDS deduction while planning your budget and managing your finances is essential. By factoring in the reduced cash inflow due to TDS, you can ensure you have adequate funds to meet your financial obligations.

2. Tax Credit: The TDS deducted on fixed deposits is credited to your income tax account. When filing your income tax returns, you can adjust this TDS amount against your total tax liability. It is crucial to include the TDS details in your tax return to claim the credit. By doing so, you can effectively utilise the TDS amount and reduce your tax liability.

3. Refund or Additional Tax: The TDS deduction is based on a predetermined rate, which may not accurately reflect your tax liability. Depending on your overall income and applicable tax slab, you may be eligible for a tax refund if the TDS deducted is more than your actual tax liability. On the other hand, if the TDS deducted is lower than the actual tax liability, you will need to pay the additional tax amount. It is important to reconcile your TDS deduction with your actual tax liability to avoid any discrepancies.

Tips to Optimise Tax Efficiency on Fixed Deposits

To optimise the tax efficiency of your fixed deposit investments, consider the following tips:

1. Splitting Investments: One strategy to optimise tax benefits is to divide your fixed deposit investments across different financial institutions. By doing so, you can ensure the interest income from each institution remains below the threshold limit for TDS deduction. This approach can minimise the overall TDS deduction and improve your tax efficiency.

2. Tax-Saving Fixed Deposits: Explore tax-saving fixed deposits that come with a lock-in period of five years. These fixed deposits offer tax deductions under Section 80C of the Income Tax Act. By investing in these deposits, you can not only earn fixed returns but also save on taxes.

3. Invest in Cumulative Deposits: Consider investing in cumulative fixed deposits instead of opting for regular interest payouts. With cumulative deposits, the interest is compounded and reinvested, leading to better overall returns. Additionally, by deferring the tax liability until maturity, you can effectively manage your tax obligations and enhance your tax efficiency.

4. Tax Planning and Advice: Seek guidance from a financial advisor or tax consultant to ensure effective tax planning and maximise the benefits of your fixed deposit investments. They can provide personalised advice based on your financial goals and circumstances, helping you make informed decisions and optimise your tax efficiency.

Final Word:

As an investor, understanding the tax implications of fixed deposits is crucial for effective financial planning. While FDs offer stability and steady returns, it is important to consider the impact of TDS on your cash flow and tax liability. By familiarising yourself with the taxation rules, exploring tax-saving options, and seeking professional advice, you can optimise your fixed deposit investments and ensure tax efficiency. Stay informed about any changes in tax regulations and incorporate them into your investment strategy to make the most of your fixed deposit savings.