Fixed Deposits (FD) might be the safest option for individuals to park their surplus money and earn higher fixed deposit rates compared to savings accounts. But, FDs are not the right instrument for tax saving purposes as the interest earned on it is subject to income tax. Many people do not pay taxes because of lack of awareness or intent of many investors,
This article will focus on when and how you should pay income tax on FD interest income.
How is Interest Income Treated?
The interest income is fully taxable and is deducted at source by the bank at the time of credit of interest to your account.
During income tax filing, the total interest income earned from fixed deposits should be shown under the head “Income from Other Sources.” It is taxed as per the tax slab rate you fall into. The TDS gets adjusted against your final tax liability and is refunded if your total tax liability is less than the deducted amount or zero.
If there is any tax liability arising out of interest income from FDs. It is not deducted from the source, and you must pay it before the end of the financial year, i.e., 31st of March.
How Are Fixed Deposits Taxed?
For an individual having a total interest income from all FDs of up to Rs 40,000 in a year, banks will not deduct TDS. And, the amount goes up to Rs. 50,000 in a year for senior citizens.
If the total interest income from all FDs exceeds Rs. 40,000 in a financial year, the bank would deduct a TDS of 10% on the total interest income, provided the bank has your PAN information.
In case you have not provided your PAN information to the bank, they would deduct a TDS of 20% on the total interest income. If your only income is from interest income from FDs and if it is less than the minimum tax rate slab, then there will be no tax liability.
To ensure that your bank doesn’t deduct the TDS, you have to submit the Form 15G/15H. And, if the bank deducts any money by chance, then you can claim a refund during filing the income tax return.
If you come under the higher income tax rate slab of 20% or 30%, then you are liable to pay the difference in tax over the TDS which is charged as Self-Assessment Tax.
Fixed Deposit Calculator
The banks credit the interest to your FD account when it is due for a deposit, and not during the maturity. Hence, it becomes essential for you to calculate your annual interest income as taxes should be paid on the annual interest income, not on the maturity amount.
To calculate your actual tax incidence on the interest income, you can use an online fixed deposit calculator.
There is no special provision under the Income Tax Act for tax calculation on interest income. Therefore, the investor should pay taxes on interest income generated from FDs according to their income tax slab rate.
The investor should also calculate overall tax liability accordingly and match with Form 26AS to prevent any discrepancies.