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ITR

How to Pay Income Tax on Fixed Deposit’s Interest Income?

If you are looking for the details regarding the payment of income tax on FD’s in India, read this blog.

How is interest income taxed?

Banks are required to deduct Tax Deducted at Source (TDS) when they credit interest to your account. The threshold for TDS varies:

  • For individuals, other than senior citizens, TDS is deducted when the interest amount exceeds Rs. 40,000.
  • For senior citizens, the threshold is Rs. 50,000.

It’s essential to note that TDS is deducted at the time of crediting the interest, not when the fixed deposit matures. If you have a multi-year fixed deposit, TDS will be deducted at the end of each year.

You may know that the income you earn from the interests on investment methods like recurring deposits, fixed deposits, binds etc., are supposed to pay tax. In your income tax return, you must reveal the facts about interest income.

For many investors, including senior citizens, fixed deposits remain a famous investment option. It is due to Fixed deposits (FD) being rectified investment methods that can not get affected by any market forces. They give a constant rate of returns. Also, the rate of harm from losing your equity is reduced to a great degree. 

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However, the constant or steady returns from FD could mean the tax payment is necessary. The revenue from your FDA is summed up to your other income under the title of income from other sources and is taxed at the same rate. 

You can lessen your payable taxes by taking tax benefits accessible under the Income Tax Act, of 1961. But before availing of these benefits, you should know how this interest income is taxed. Let’s have a look at the taxability of interested incomes. 

Interest income on Recurring Deposits / Domestic Fixed

The earned income interest from the fixed deposit is subjected to tax, and you must pay taxes following applicable tax rates for the particular financial year under IT Act. When the interest income is more than rupees 40,000 ( Rs 50,000 for senior citizens), the bank withdraws the tax at source (TDS) for interest paid on FD in any financial year. 

The present TDS rate for inhabitants on interest income over the upper limits is 10%. But, it can become up to 20% in case you do not have PAN or for a specified person.  The specified person is one who had not documented their income tax returns from the last two years and has a combined TCS/TDS status of Rs 50,000 or more in each of the previous two years. The TDS for NRIs is at the rate of 30% and good cess and surcharge.  

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You can avail of protection on TDS by documenting a Form 15G (for senior citizens, it is Form 15H) if your overall income from all other sources is below the maximum amount not subjected to tax. As per section 80TTB, senior citizens can allege a deduction on interest income to RS 50,000.  

Interest Income on Savings Account

If you are earning an interest income of Rs 10,000 from your saving account, you can argue for a tax deduction as per sec 80p of the IT Act. However, if the amount is more than 10,000, it will be subjected to tax according to slab taxes. To check the protection limit, sum up all their interest income from all available accounts, including post office accounts, bank accounts and joint bank accounts. As per the 80u deduction, senior citizens can deduct interest income on fixed deposits and saving accounts up to Rs 50,000. 

Interest Income on Corporate Bonds

Corporate bonds issued by private or public corporations are subjected to tax according to slab rates for an accrual purpose. The earnings from the corporate binds are comprised of the title’s income from other sources, whereas the loss or profit from the bond sales is taxable under equity gains. However, under Section 10(15)(iv)(h) of the IT Act, interest-earning on tax-free bonds is protected from being subject to tax. These bonds are usually government bonds or public undertakings like Indian Renewable Energy Development Agency Ltd.

Understanding TDS

TDS, or Tax Deducted at Source, is the tax that the payer deducts before making a payment. In the context of interest income, the bank deducts TDS and remits it to the government. The amount you receive is the net interest income after TDS deduction. However, you must report the gross interest income in your ITR and then claim a refund or tax credit for the TDS deducted.

TDS on Recurring Deposits (RDs)

Interest income from Recurring Deposits (RDs) is also taxable. It follows the same TDS provisions as fixed deposits. TDS is levied on RDs when the interest payable in a single bank exceeds Rs. 10,000.

How to Calculate Tax on Interest Income?

To calculate the tax on your interest income, add the interest to your total income when filing your ITR. The income tax department will adjust the TDS already deducted against your final tax liability. If the bank does not deduct TDS from your interest income, you need to add the entire interest income to your total income and pay tax on it.

It’s advisable not to wait until the maturity of your fixed deposit to report the interest income, as the accumulated interest could push you into a higher tax slab.

Use the Income tax calculator on Vakilsearch to quickly calculate your taxes and submit your ITR.

The income tax department will revise the TDS already deducted against your ultimate tax liability. 

If your bank does not withdraw the TDS from the interest-earning, the interest-earning attained from your FDs in a specific financial year is to be summed to your total earnings and then subject to tax. 

It is not recommended to stay until your FD gets mature when interest is certainly received – to document the interest-earning. This may be because the accumulated interest can push you to a higher Income Tax Slab, and you may have to pay more tax. By viewing your Form 26AS, you can see any TDS on your accounts. 

When to pay tax on Interest Income?

TDS is not deducted by the bank if your interest income from all FDs with the bank is less than Rs. 40,000 in a year (or Rs. 50,000 for senior citizens). This is a change from the earlier threshold of Rs. 10,000.

The bank estimates your interest income for the year from all your FDs. TDS is deducted at a rate of 10% if your interest income exceeds the threshold.

In case you do not provide your PAN details to the bank, they will deduct TDS at a rate of 20%. Ensure that the bank has your PAN details to avoid higher TDS.

Understanding TDS in relation to FDs

No TDS: If your interest income from all FDs with a bank is less than Rs. 40,000 in a year (Rs. 50,000 for senior citizens), the bank won’t deduct any TDS.

10% TDS: Banks estimate your total interest income for the year. If it exceeds Rs. 40,000 (Rs. 50,000 for senior citizens), they deduct 10% TDS.

20% TDS: If you don’t provide your PAN information, the bank will deduct 20% TDS.

Income Below Rs. 2.5 Lakh: If your total income is less than Rs. 2.5 lakh, no TDS is deducted.

To prevent TDS, submit Form 15G (for those below 60 years) or Form 15H (for those 60 years or above) to the bank before the due date.

Interest from FD for senior citizens

No TDS: If your interest income from all FDs with a bank is less than Rs. 40,000 in a year (Rs. 50,000 for senior citizens), the bank won’t deduct any TDS.

10% TDS: Banks estimate your total interest income for the year. If it exceeds Rs. 40,000 (Rs. 50,000 for senior citizens), they deduct 10% TDS.

20% TDS: If you don’t provide your PAN information, the bank will deduct 20% TDS.

Income Below Rs. 2.5 Lakh: If your total income is less than Rs. 2.5 lakh, no TDS is deducted.

To prevent TDS, submit Form 15G (for those below 60 years) or Form 15H (for those 60 years or above) to the bank before the due date.

Income Tax on Fixed Deposit Interest for a Housewife

As a homemaker with a fixed deposit (FD) investment of Rs. 5 lakhs, you might be wondering about your tax obligations, especially considering the TDS deductions. Here’s what you need to know:

  1. Filing Income Tax Return: Whether or not you need to file an income tax return depends on whether your total income exceeds the basic exemption limit. If your income is below this limit, you aren’t obligated to file a tax return.
  1. Claiming Refund of TDS: If TDS has been deducted from your FD interest income, you can claim a refund when filing your income tax return. The process for claiming the refund is an essential step in ensuring you receive the correct amount.
  1. Form 15G/15H Submission: To prevent TDS deductions on your FD interest income, you can submit either Form 15G (if you’re below 60 years) or Form 15H (if you’re 60 years or older) to your bank. 

However, there are conditions to meet for submitting these forms:

  • Your total income should be below the basic exemption limit of Rs. 2.5 lakhs for those below 60 years 
  • Your total income should be below the basic exemption limit of Rs. 3/5 lakhs for those 60 years or older.

Understand the Calculation of your Tax:

If the interest earnings in any provided fiscal year surpass the predetermined boundaries, TDS is applied. 

Let’s take a few examples to understand how you can calculate your tax on interest income.

  1. Sabah plunges into a 20% tax frame. She has two FDs with a bank of Rupees 1,00,000, each for 3 years at the rate of 6% interest per year. In the beginning year, her interest earnings are 6,000 from every FD. Total income gained is 12,000 in the beginning year. Bank doesn’t withdraw any TDS as the amount is below 40,000, to which the bank charges for TDS. 
  2. Farhan has an FD of 10 lakh rupees at 6% interest per annum. He gets an annual interest of 60,000 rupees. The bank deducts a TDS on the full 60,000 at the rate of 10% as the prescribed TDS rate. That means 6000 rupees will be dedicated from his account per annum, and that amount will be paid to the central government. 

How large amount of FD is tax-free?

When capitalizing in FD, an investor is eligible to insist a revenue tax protection on involvements up to 1.5 lakh rupees. The earned interest on a tax saving FD is subjected to tax and is deducted at the source as TDS. Options like overdraft, loan, or early withdrawal are not available in the case of tax-saving fixed deposits. 

How to Save Tax on FD?

As per section 80 of the income tax act, the principal amount of the FD is protected from the tax, but the interest income from this amount is still taxable. However, if the interest income is less than 40,000 from your fixed deposit, then your earned amount can not be subject to tax.

Besides this, many options exist to save tax on fixed deposit interest. Some of them are as: 

  • Form 15G/15H –

If you fulfill the 15G form asserting that you earn no taxable earnings, then the bank will also free your income. The same is applied to senior citizens with the help of form 15H. 

  • Fixed Deposit Distribution –

If you allocate the fixed deposit quantity to several banks, you can save on TDS as the interest received separately from every bank will not be more than the maximum of Rs. 40,000.

  • Planning FD Timings –

 Another method to save your deductions on FD interest is by putting the deposit period so that the interest received in the apprehensive financial year should not be more than the barrier of Rs. 40,000.

  • Fixed Deposit Split –

You can also divide your fixed deposit into your HUF and personal account. Both of the accounts will be evaluated as different commodities, and this will maintain the interest received on every account low.

Conclusion 

Every eligible citizen has to pay the tax on their income. When you are doing a good job or your income source is efficient, you will earn more and more. Everyone is thinking of keeping these as fixed deposits. But before doing so, you should know all the important things regarding your fixed deposits. The main and important thing you should know is the interest income tax from fixed deposits. In case you need any help, go through the Vakilsearch. It will assist you on every step, and you will get a piece of good information from it regarding the Fixed Deposit’s Interest Income. 

FAQ:

1. What is the tax payable on FD interest?

The interest earned from fixed deposits is fully taxable, and it forms a part of the total tax liability of the individual. The tax rate on FD interest is based on the income tax slab rate of the individual.

2. Will I be able to get FD interest without TDS if my income is below the taxable limit?

Yes, if your total income is below the taxable limit, no TDS will be applied to the interest generated on your FD.

3. What is the tax deduction on FD interest for senior citizens?

Senior citizens can claim a tax deduction of up to Rs. 50,000 on FD interest income while filing their income tax return. If the senior citizen’s interest income from all FDs with a bank is less than Rs. 50,000 in a year, the bank cannot deduct any TDS.

4. What is the TDS rate on FDs?

The TDS rate on FDs is 10% of the interest earned, provided the interest income exceeds Rs. 40,000 in a financial year. For senior citizens, the limit is Rs. 50,000.

5. Can I claim deduction for the interest income earned from fixed deposits?

No, the Income Tax Act does not provide for any deduction on interest from FDs. However, senior citizens can claim a tax deduction of up to Rs. 50,000 on FD interest income while filing their income tax return.

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