How to pay Income Tax on Fixed Deposit Interest: FD interest

Fixed deposits (FDs) are a popular investment choice in India due to their safety and guaranteed returns. However, the interest earned on FDs is subject to income tax. Understanding the tax implications can help you manage your investments more effectively and avoid any surprises during tax season. This guide will provide detailed information on how income tax on fixed deposit interest works, how it is calculated, and tips for efficient tax planning.

What is Fixed Deposit Interest?

A fixed deposit is a financial instrument provided by banks or Non-Banking Financial Companies (NBFCs) that offer investors a higher rate of interest than a regular savings account, until the given maturity date. The interest earned on these deposits is considered income and is therefore taxable. 

How is fixed deposit interest taxed?

• Interest earned is taxable: 
  • The interest earned on FDs is added to your total income and taxed as per your income tax slab.
  • There is no separate tax rate for FD interest; it is taxed according to the individual’s applicable tax slab.

• Tax Deducted at Source (TDS): 
  • Banks and financial institutions deduct tax at source on FD interest if it exceeds a certain threshold.
  • For individuals under the age of 60, TDS is deducted if the interest exceeds INR 40,000 in a financial year.
  • For senior citizens (aged 60 years and above), the threshold is INR 50,000. 

• TDS Rates: 
  • The standard TDS rate on FD interest is 10% if your Permanent Account Number (PAN) is provided to the bank.
  • If PAN is not provided, TDS is deducted at 20%.

Understand the income tax slab for senior citizens.

How to calculate income tax on fixed deposit interest?

To calculate the tax on your FD interest, you need to add the interest income to your total income for the financial year. This includes salary, rental income, business income, and any other sources of income. 

The income tax rates for individuals below 60 years of age are as follows: 

• Up to INR 2.5 lakhs: Nil 
• INR 2,50,001 to INR 5 lakhs: 5% 
• INR 5,00,001 to INR 10 lakhs: 20% 
• Above INR 10 lakhs: 30% 

For senior citizens (60 to 80 years), the basic exemption limit is INR 3 lakhs, and for super senior citizens (above 80 years), it is INR 5 lakhs. 

For example, let’s say you are below 60 years of age and your total annual income, including FD interest, is INR 8 lakhs. If your FD interest for the year is INR 50,000, here’s how the tax would be calculated: 

• Total income: INR 8 lakhs 
• Taxable income (after exemptions/deductions, if any): INR 8 lakhs 

• Tax calculation: 
  • Up to INR 2.5 lakhs: No tax 
  • INR 2.5 lakhs to INR 5 lakhs: 5% of INR 2.5 lakhs=INR 12,500 
  • INR 5 lakhs to INR 8 lakhs: 20% of INR 3 lakhs=INR 60,000 
  • Total tax = 12,500+60,000=INR 72,500 

If TDS of INR 5,000 (10% of 50,000) has already been deducted by the bank, you will need to pay the remaining tax of INR 67,500 (72,500-5,000) when filing your income tax return. 

When to pay tax on Interest Income?

• Quarterly advance tax payments: 
  • If your total tax liability for the financial year exceeds INR 10,000, you are required to pay advance tax in quarterly installments. The schedule is as follows: 
    • 15% of the estimated tax liability by June 15 
    • 45% of the estimated tax liability by September 15 
    • 75% of the estimated tax liability by December 15 
    • 100% of the estimated tax liability by March 15 

• Annual tax return filing: 
  • Even if TDS has been deducted from your interest income, you must file your income tax return (ITR) annually. 
  • Declare all your interest income and pay any remaining tax liability by the due date (typically July 31 for individuals). 

What is the importance of TDS on interest on Fixed Deposit?

• TDS thresholds and rates:
  • Banks deduct TDS on FD interest if the interest exceeds INR 40,000 in a financial year for individuals below 60 years of age. For senior citizens (60 years and above), the threshold is INR 50,000. 
  • The standard TDS rate is 10% if you have provided your PAN. If PAN is not provided, TDS is deducted at 20%. 

• Avoiding TDS:
  • If your total income is below the taxable limit, you can submit Form 15G (for individuals under 60 years) or Form 15H (for senior citizens) to the bank to avoid TDS deduction. These forms must be submitted at the beginning of the financial year. 

• Claiming TDS refund:
  • If TDS has been deducted but your total income is below the taxable limit, you can claim a refund by filing your ITR.
  • Ensure you include the interest income in your return and claim the TDS deducted as a credit. 

Interest from fixed deposit for Senior Citizens

• Higher TDS Threshold: 
  • For senior citizens, the TDS threshold is INR 50,000 in a financial year. 

• Tax Benefits: 
  • Under Section 80TTB, senior citizens can claim a deduction of up to INR 50,000 on interest income from FDs, savings accounts, and post office savings accounts. 
  • Senior citizens can invest in the SCSS, which offers higher interest rates and tax benefits under Section 80C, although the interest earned is still taxable. 

For example, suppose a senior citizen earns INR 3 lakhs as pension and INR 60,000 as interest from FDs. So, the total income is INR 3.6 lakhs and deduction under Section 80TTB is INR 50,000. Then, the taxable income is INR 3.1 lakhs (3,60,000- 50,000)

Type of Depositor	Financial Institution	Threshold Limit for TDS Deduction	TDS Rate (with PAN)	TDS Rate (without PAN)
Senior Citizen	Banks	INR 50,000	10%	20%
	Cooperative Banks	INR 50,000	10%	20%
	Post Office	INR 50,000	10%	20%
	NBFCs	INR 50,000	10%	20%
Normal Citizen	Banks	INR 40,000	10%	20%
	Cooperative Banks	INR 40,000	10%	20%
	Post Office	INR 40,000	10%	20%
	NBFCs	INR 40,000	10%	20%

Income Tax on Fixed Deposit interest for Housewife

• Taxable Income: 
  • Interest earned on FDs by a housewife is taxable as per her applicable income tax slab. If she has no other income, the basic exemption limit of INR 2.5 lakhs applies. 

• Clubbing of Income: 
  • If the FD is funded by the husband, the interest earned may be clubbed with the husband’s income and taxed accordingly, unless it is proved that the funds were given as a gift and properly documented. 

For example, suppose a housewife has no other income except INR 30,000 as interest from fixed deposits. Then, the total income is INR 30,000. Since the income is below the basic exemption limit, no tax is payable. 

How to plan your tax effectively?

If you are a senior citizen or housewife taxpayer, there are some steps which helps you plan your taxes effectively. Let us look one by one. 

• Submit Form 15G/15H: 
  • If your total income is below the taxable limit, you can submit Form 15G (for individuals under 60 years) or Form 15H (for senior citizens) to the bank to avoid TDS deduction. 

• Spread out your FDs: 
  • By spreading your investments across multiple banks, you can keep the interest earned from each bank below the TDS threshold, thereby minimizing TDS deductions. 

• Tax-Saving fixed deposits: 
  • Consider investing in tax-saving fixed deposits with a 5-year lock-in period, which qualifies for a deduction of up to INR 1.5 lakhs under Section 80C of the Income Tax Act. 

• Senior Citizen Savings Scheme (SCSS): 
  • Senior citizens can invest in SCSS, which offers higher interest rates and tax benefits under Section 80C, although the interest earned is still taxable. 

• Separate Investments: 
  • A housewife can invest in her own name if she has her own source of income or savings. This helps in avoiding clubbing of income. 

• Form 15G: 
  • If her total income is below the taxable limit, she can submit Form 15G to avoid TDS deduction. 

• Gift Documentation: 
  • If the husband gifts funds to the wife, ensure proper documentation to avoid clubbing of income. 

Conclusion

In conclusion, Income Tax on fixed deposit Interest is crucial for effective financial planning. By being aware of how FD interest is taxed and utilizing available tax-saving strategies, you can optimize your investments and minimize your tax liability. 

Always comply with tax regulations to avoid any penalties or issues with the tax authorities. Looking for a tax expert for filing your income tax return? 24eFiling is your solution. Reach out directly now.  

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