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.

While Fixed Deposits (FDs) offer capital protection and guaranteed returns, the interest you earn is taxable income. This article clarifies how FD interest income is taxed and what you need to know to pay your taxes on time.

How is interest income taxed?

The taxation of interest income depends on the type of account and your tax situation. Here’s a breakdown:

Tax Rates:

• Generally, interest income is taxed as ordinary income at your marginal tax rate. This means it’s added to your other income and taxed at the rate corresponding to your total income bracket.

Exemptions and Deductions:

• Savings Account Interest: Up to a certain amount of interest earned on savings accounts may be exempt from tax. The exact amount varies depending on your country. For instance, in India, you can claim a deduction of up to Rs. 10,000 under Section 80TTA of the Income Tax Act.

• Senior Citizens: Some countries offer special tax breaks for senior citizens on interest income. In India, for example, senior citizens can claim a deduction of interest income up to Rs. 50,000 on fixed deposits and savings accounts under Section 80TTB.

Tax Withholding at Source (TDS):

• Banks or financial institutions may withhold tax at source (TDS) on interest income exceeding a specific limit. This is like a prepayment of your tax liability. You can claim credit for this TDS when you file your income tax return.

Reporting Interest Income:

• You’ll typically receive a form (like a 1099-INT in the US) from the bank or institution detailing your interest income. This amount needs to be reported on your tax return.

Interest income on Recurring Deposits / Domestic Fixed

Interest income on Recurring Deposits (RDs) and Domestic Fixed Deposits (FDs) in India is taxable, but there are some things to keep in mind:

Tax on Interest:

• The interest earned on both RDs and FDs is considered ordinary income and taxed at your marginal tax rate.

Tax-Exempt Limit:

• A portion of the interest income might be tax-free. For senior citizens (aged 60 and above), the first Rs. 50,000 of interest income from FDs and RDs in a financial year is exempt from tax under Section 80TTB of the Income Tax Act.
• For individuals below 60 years old, the first Rs. 40,000 of total interest income (from all sources) is tax-free.

Tax Deducted at Source (TDS):

• Banks deduct TDS (Tax Deducted at Source) on the interest income if it exceeds Rs. 40,000 in a financial year (except for senior citizens whose limit is Rs. 50,000). This is deducted when the interest is credited to your account, not at maturity.
• You can claim credit for this TDS when you file your income tax return.

Interest Income on Savings Account

Interest income on savings accounts in India is treated differently compared to Fixed Deposits (FDs) and Recurring Deposits (RDs). Here’s a breakdown:

Tax on Interest:

• Interest on savings accounts is also considered ordinary income, but there’s a tax exemption available under Section 80TTA of the Income Tax Act.

Tax Exemption:

• You can claim a deduction of up to Rs. 10,000 on the interest earned from all your savings accounts combined in a financial year. This means the first Rs. 10,000 of your total savings account interest income is not taxed.

Tax Withholding (TDS):

• Unlike FDs and RDs, there is typically no TDS (Tax Deducted at Source) on savings account interest income. The bank doesn’t withhold any tax before crediting the interest.

Important points to remember:

• The Rs. 10,000 deduction applies to the total interest earned from all your savings accounts. Even if you have multiple accounts with different banks, the Rs. 10,000 limit applies collectively.
• If your total savings account interest income exceeds Rs. 10,000, the amount exceeding Rs. 10,000 will be taxed at your marginal tax rate.

Interest Income on Corporate Bonds

Interest income on corporate bonds in India is subject to tax, similar to other interest-bearing instruments. Here’s a breakdown of the taxation:

Tax on Interest:

• The interest earned on corporate bonds is considered ordinary income and taxed at your marginal income tax rate bracket.

Tax Withholding at Source (TDS):

• As of April 1, 2023, a Tax Deducted at Source (TDS) of 10% applies to the interest income on both listed and unlisted corporate bonds. This means the bank or financial institution holding the bond will deduct 10% of the interest earned before crediting it to your account.

No Tax Exemptions:

• Unlike savings accounts or interest income for senior citizens on FDs/RDs, there are currently no specific tax exemptions for interest earned on corporate bonds. The entire interest income is considered taxable.

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?

Calculating tax on interest income in India involves understanding a few key factors:

1. Tax Rate: Interest income is generally taxed at your marginal tax rate in India. This means it’s added to your other taxable income and taxed according to the slab you fall under.

2. Tax Exemptions and Deductions: There are some exemptions and deductions available for specific types of interest income:

   • Savings Account: Up to Rs. 10,000 of the total interest earned from all your savings accounts in a year is exempt from tax under Section 80TTA.
   • Senior Citizens (FD/RD Interest): Senior citizens (aged 60 and above) can claim a deduction of up to Rs. 50,000 on interest income from FDs and RDs under Section 80TTB.

3. Tax Deducted at Source (TDS): Banks or financial institutions may deduct TDS on interest income exceeding a certain limit:

   • Rs. 40,000 for individuals below 60 years old (total interest income)
   • Rs. 50,000 for senior citizens (interest on FDs/RDs)

Here’s a simplified method to calculate your tax on interest income:

Step 1: Determine your total interest income.

Add up all the interest income you earned from various sources in a financial year (e.g., savings accounts, FDs, RDs, corporate bonds).

Step 2: Apply tax exemptions/deductions (if applicable).

• For savings accounts, deduct up to Rs. 10,000 from your total interest income.
• If you’re a senior citizen claiming the deduction under Section 80TTB, deduct the applicable amount from your FD/RD interest income (up to Rs. 50,000).

Step 3: Calculate taxable interest income.

Subtract any tax exemptions/deductions applied in step 2 from your total interest income (step 1). This will give you the taxable interest income amount.

Step 4: Check TDS (if applicable).

• If your taxable interest income (step 3) exceeds the threshold for TDS (Rs. 40,000 or Rs. 50,000 for senior citizens), there likely would have been TDS deducted by the bank.
• You can find the TDS amount on your account statement or Form 16 (provided by the bank).

Step 5: Calculate final tax liability.

• Apply your marginal tax rate to the taxable interest income (step 3).
• Subtract the TDS amount (step 4) from the tax calculated in the previous step.

This will be your net tax liability on the interest income.

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?

In India, you don’t directly pay tax on interest income throughout the year. However, there are two key aspects to consider:

1. Tax Deducted at Source (TDS):

• Banks or financial institutions might deduct TDS on your interest income if it exceeds a specific limit:
  • Rs. 40,000 for individuals below 60 years old (total interest income from all sources)
  • Rs. 50,000 for senior citizens (interest on FDs/RDs)
• This deduction happens at the time the interest is credited to your account, not necessarily when it matures.
• The deducted TDS is essentially a prepayment of your tax liability on that interest income.

2. Income Tax Return Filing:

• You need to file your income tax return (ITR) by the due date specified by the Income Tax Department (typically July 31st for the previous financial year).
• While filing your ITR, you need to report all your income, including interest income.
• If the TDS deducted on your interest income covers your entire tax liability on that income, you might not have any additional tax to pay.
• However, if the TDS amount is less than your tax liability on interest income (due to exceeding the exemption limits or higher tax bracket), you’ll need to pay the remaining tax while filing your ITR.

Here’s a breakdown of when things happen:

• Throughout the year: Banks deduct TDS on interest income if applicable.
• By July 31st (or extended deadline): File your income tax return, report all interest income, and pay any remaining tax liability after considering TDS.

Understanding TDS in relation to FDs

1. 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.
2. 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.
3. 20% TDS: If you don’t provide your PAN information, the bank will deduct 20% TDS.
4. Income Below Rs. 2.5 Lakh: If your total income is less than Rs. 2.5 lakh, no TDS is deducted.
5. 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.

2. 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.

3. 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.

 

Also, Read:

• Steps to File Income Tax Return Online
• How to download Income Tax Assessment Form?
• How to File an ITR in India?
• Filing of Income Tax Return In India
• Section 194K of Income Tax Act 1961
• Types of ITR forms
• Depreciation Under Income Tax Act AY 2021-22