Tax Implications of Fixed Deposits: Understanding the Details
Fixed Deposits (FDs) are a popular investment option in India, offering safety and steady returns. However, it is crucial to understand the taxation associated with the interest earned on these deposits. This blog provides a guide to the tax implications of fixed deposits (FDs), helping you plan your investments more effectively.
Is Fixed Deposit Interest Taxable in India?
Yes, the interest earned on fixed deposits is taxable in India. According to the Income Tax Act, 1961, interest from FDs is classified as “income from other sources” and is added to your total income for the year. Consequently, the tax on this interest depends on your overall income and the applicable tax rates.
What is TDS on FDs?
TDS is the tax deducted by the bank before paying you the interest. It is deducted annually on the interest you earn, not just when the FD matures.
TDS Exemption Limits
- General threshold: ₹40,000 interest per year.
- Senior citizens (above 60 years): ₹50,000 interest per year.
If your interest income exceeds these limits, the bank will deduct TDS. If your interest income is below these limits, no TDS will be deducted.
Total Tax Liability
The TDS deducted by the bank is not your total tax liability. Your actual tax will be based on your total income and the income tax slab you fall into for that year. You might need to pay additional tax if your total income puts you in a higher tax bracket or you might get a refund if you fall into a lower tax bracket.
When Do You Have to Pay Tax on FDs?
If your interest earnings from an FD exceed ₹40,000 in a financial year, the bank will deduct Tax Deducted at Source (TDS).
- For PAN holders: The TDS rate is 10%.
- For non-PAN holders: The TDS rate is 20%.
Example:
If you earn ₹50,000 in interest from your FD in a year:
– With PAN: The bank will deduct ₹1,000 (10% of ₹10,000, which is the excess over ₹40,000) as TDS.
– Without PAN: The bank will deduct ₹2,000 (20% of ₹10,000).
Explore Fixed Deposits on smallcase
What If Your Total Income is Below the Taxable Limit?
If your total income for the year is less than ₹2,50,000 (the minimum taxable income), you do not have to pay any tax, and no TDS will be deducted on your FD interest. To avoid TDS deduction, you need to submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) at the start of the financial year to instruct the bank not to deduct TDS.
Tax Treatment for Cumulative FDs
All FDs available on smallcase are cumulative FDs, where the interest payout is at maturity, TDS is still deducted each year on the interest you earn, not just at the time of maturity. This is crucial for tax planning.
Example:
Suppose you have a 3-year FD with the following details:
– Principal amount: ₹10,00,000
– Annual interest rate: 5%
– Maturity payout scheme (interest paid at the end of 3 years)
Even though the interest payout and principal are received at maturity, TDS is deducted on the interest accrued each year and reported to the tax authorities.
Implications for Investors
- Annual Reporting: You need to include the interest earned each year in your annual income tax return, even though you have not received the interest payment yet.
- Form 26AS: The TDS deducted by the bank will be reflected in your Form 26AS, a consolidated tax statement available on the Income Tax Department’s website.
- Maturity Amount: At maturity, you will receive the total principal amount plus the net interest (after TDS deduction).
Filing Tax Returns
When filing your income tax return, you must report the interest income earned each year and claim credit for the TDS deducted against your total tax liability for that year.
Conclusion
Understanding the tax implications of fixed deposits is essential for effective tax planning and investment management. By being aware of the TDS rates, exemption limits, and the proper way to report interest income, you can ensure compliance and optimize your tax liability. Always consult with a tax professional or financial advisor for personalized advice.
Fixed Deposits on smallcase provide a secure and straightforward investment option, offering high interest rates and convenience of a fully digital process. Whether you’re looking for stable returns or diversifying your investment portfolio, FDs on smallcase are an excellent choice. Start investing today and enjoy the peace of mind that comes with safe and reliable returns.
