Fixed deposits (FDs) are a popular savings option in India, offering guaranteed returns. However, the interest earned on these deposits is taxable, which affects the overall returns. Here's a simple guide to understanding how tax works on FDs, including how to calculate it, claim deductions, and save on taxes.
Is Fixed Deposit Interest Taxable?
Yes, the interest earned on an FD is taxable under the ‘Income from Other Sources’ category. It is taxed at your applicable income tax slab rate:
If your income falls under the 30% slab, your FD interest is taxed at 30%.
Tax-saving FDs (with a 5-year lock-in) allow deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act.
How to Calculate Tax on FD Interest
Follow these steps:
Include FD Interest in Income: Add the total FD interest earned during the financial year to your ‘Income from Other Sources.’
Calculate Total Income: Add income from all other sources like salary, house property, etc.
Apply Deductions: Deduct eligible tax-saving investments under Section 80C and other allowances.
Compute Tax: Calculate tax on the final income as per your slab rate.
Example
Miss Nilima’s Income Breakdown:
Salary: ₹8,00,000
FD Interest: ₹50,000
Investment in Tax-Saving FD: ₹1,00,000
Tax Calculation:
Particulars | Amount |
Income from Salary | ₹8,00,000 |
Income from Other Sources | ₹50,000 |
Total Income | ₹8,50,000 |
Less: Section 80C Deduction | ₹1,00,000 |
Net Taxable Income | ₹7,50,000 |
Tax Payable:
Income Slab | Tax Rate | Tax Amount |
Up to ₹2,50,000 | Nil | ₹0 |
₹2,50,001 – ₹5,00,000 | 5% | ₹12,500 |
₹5,00,001 – ₹7,50,000 | 20% | ₹50,000 |
Total Tax Payable = ₹62,500
Tax Deduction on FD Interest
For Individuals and HUFs (Non-Senior Citizens):
Deduction under Section 80TTA: Up to ₹10,000 on interest earned from savings accounts. Does not apply to FDs.
For Senior Citizens (Above 60 Years):
Deduction under Section 80TTB: Up to ₹50,000 on interest earned from FDs and savings accounts combined.
TDS (Tax Deducted at Source) on FD Interest
Banks deduct 10% TDS on FD interest if it exceeds ₹40,000 annually (₹50,000 for senior citizens).
No PAN? TDS is deducted at 20%.
The TDS deducted is reflected in Form 26AS, which you can use while filing your Income Tax Return (ITR).
Save TDS with Form 15G and 15H
If your total income is below the taxable limit:
Form 15G: For individuals below 60 years.
Form 15H: For senior citizens.
Submit these forms to your bank at the beginning of the financial year to avoid TDS deductions.
Frequently Asked Questions
1. Is FD Interest Tax-Free?
No, FD interest is fully taxable. However, tax-saving FDs provide a deduction under Section 80C.
2. How Much FD Interest is Tax-Free?
For senior citizens: Up to ₹50,000 under Section 80TTB.
For others: No specific exemption for FD interest.
3. Do I Need to Show FD Interest in ITR?
Yes, you must declare all FD interest earned during the year, even if TDS has been deducted.
4. What Happens If I Don’t Declare FD Interest?
Not declaring interest may result in penalties if discovered during assessment.
5. Can I Avoid TDS on FD Interest?
Yes, by submitting Form 15G/15H if your total income is below the taxable limit.
Quick Tips to Save Tax on FDs
Opt for Tax-Saving FDs under Section 80C.
Submit Form 15G/15H to avoid unnecessary TDS if your income is below the taxable limit.
Invest in diversified options like mutual funds or PPF for better post-tax returns if you fall in higher tax brackets.
With these insights, you can manage your FD investments smartly and maximize your post-tax returns.
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