Fixed deposits, or FDs, are popular investment options in India. They tend to be less risky and offer predetermined returns. However, it is important to understand the tax implications associated with the interest earned on these deposits. The interest income from FDs is fully taxable and falls under the category of ‘Income from Other Sources.’ TDS applies when the interest exceeds a specified limit. Understanding what is FD and its tax rules is important to plan taxes effectively with fixed deposits. The guide aims to provide a complete overview of taxation on the interest of a fixed deposit, tips on effective management of tax liability, and more.
Understanding Taxation on Fixed Deposit Interest
The income on fixed deposits is fully taxable under the Income Tax Act 1961. It falls under the category of ‘Income from Other Sources’ and needs to be included within the tax return for the individual. Such income from interest added to the total income of the individual for the financial year is taxed as per the appropriate slab of income tax. This would imply that the interest accrued on fixed deposits would be taxed according to the total income of the individual, and the tax rate would be determined according to the income tax slabs.
Tax Deducted at Source (TDS)
The banks and financial institutions are supposed to deduct TDS on the interest earned on fixed deposits once it crosses a certain limit. TDS is deducted from the account if the total interest earned in a financial year exceeds a certain limit for individuals under 60 years of age. For senior citizens, the TDS deduction limit is usually higher. If PAN is provided to the bank, the standard rate of TDS is applied. If PAN is not provided, a higher rate of TDS is applied.
It is important to note that TDS is deducted at the time of crediting interest to your account, not at the maturity of the fixed deposit. For instance, if a fixed deposit has a multi-year tenure, TDS will be deducted annually, based on the interest credited to the account each year.
Reporting Fixed Deposit Interest in Income Tax Returns
When filing income tax returns, it is crucial to report all interest income from fixed deposits accurately. Even if the bank has deducted TDS, individuals may include the total interest earned from FDs in their income tax return under ‘Income from Other Sources.’ This can ensure compliance with tax regulations and help avoid potential penalties. If TDS has been deducted, individuals may verify this amount through Form 26AS, which provides a summary of all taxes deducted against their PAN. This form can be accessed online through the Income Tax Department’s website.
Ways to Minimise Tax Liability on Fixed Deposit Interest
While fixed deposit interest is taxable, there are strategies investors may consider to minimise their tax liability:
- Submit Form 15G or 15H: If an individual’s total income is below the taxable limit, they can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to their bank. This form requests that no TDS be deducted since their income falls below the taxable limit.
- Invest in Tax-Saving Fixed Deposits: Some fixed deposits may be eligible for tax deductions under Section 80C of the Income Tax Act. These deposits often come with a lock-in period of five years, providing an opportunity for individuals to reduce their taxable income by claiming deductions.
- Consider Other Investment Options: Individuals may explore alternative investment options that offer more reasonable tax benefits or lower tax liabilities compared to fixed deposits. Options such as the Public Provident Fund (PPF), National Pension System (NPS), or equity-linked savings schemes (ELSS) may have the potential to provide favourable tax treatment.
- Plan Withdrawals Strategically: If an individual has multiple fixed deposits maturing at different times, planning withdrawals strategically might help manage taxable income effectively across financial years.
Difference Between FD and RD
Fixed deposits (FDs) and recurring deposits (RDs) are two popular savings options in India, each serving different financial needs. In the context of FD vs RD, an FD requires a lump sum investment made at the beginning of the term, allowing the investor to earn interest on the entire amount for a fixed period. In contrast, an RD involves regular monthly contributions over a specified tenure, helping individuals cultivate a habit of saving. While both options offer similar interest rates, FDs typically provide higher returns due to the larger initial investment. Understanding these differences can help individuals choose the right deposit based on their financial goals and saving habits.
Conclusion
Understanding the tax implications of fixed deposits is essential for effective financial planning. The interest earned on FDs is fully taxable and must be included as part of the total income. Banks deduct TDS if the interest exceeds certain limits, and it is important for individuals to accurately report this income when filing their income tax returns. A proper understanding of these rules and implementing strategies to manage tax liabilities can help investors optimise their returns from fixed deposits while staying compliant with tax laws. It is always advisable to consult a qualified financial advisor or tax professional to develop strategies that suit personal financial goals and circumstances.