Fixed Deposits (FDs) allow you to exploit the complete potential of Section 80C to deduct Rs.1.5 lakh from your taxable income. It also ensures capital protection along with some interest returns. However, the interest income earned on the fixed deposit is taxable. Seldom do investors think about paying tax on the interest income on time. This article will cover when and how to pay income tax on FD interest income.
How is Interest Income Taxed?
Interest income from fixed deposits is fully taxable. Add it to your total income and get taxed at slab rates applicable to your total income. It is to be reported under the head ‘Income from Other Sources’ in your Income Tax Return.
Banks deduct tax at source at the time of crediting interest to your account if the amount of interest is beyond Rs.40,000 for individuals other than a senior citizen (in the case of senior citizen, the threshold is Rs.50,000).
Hence it should be remembered that the TDS is deducted at the time of credit of interest and not when the FD matures. So, if you have an FD for 3 years – banks shall deduct TDS at the end of each year. (See below for more details on TDS on FDs).
Core Banking Solutions (CBS):
CBS enables the banks to provide centralised services to their customers. In the case of the banking institution which has adopted Core Banking Solutions, the interest credited in respect of Fixed deposits by all the branches of the bank is aggregated to arrive at the total interest credited in order to know whether the aggregate amount comes within the ceiling limit for deducting TDS.
It can be understood with the below example.
Mr.A made three fixed deposits of Rs.2,50,000 each at 9% with the Dwaraka, Janakpuri & Rohini branches of XYZ bank which has adopted CBS. In this case, despite of the annual interest being Rs.22,500 (i.e. 2,50,000*9/100) individually, which is within the prescribed limit of Rs.40,000, the bank needs to deduct TDS @ 10% under Section 194A considering the aggregate amount of interest credited by all branches exceeds the threshold limit of Rs.40,000.
Understanding TDS
When you receive certain payments, the person paying you has to deduct tax before making the payment. This tax deducted at source is called TDS, which they pay to the Central Government.
You will receive the credit of the amount net of tax. You then have to add the gross amount to your income while reporting it in your income tax return. As against this, the credit of TDS is also provided from the total tax liability or a TDS refund is offered in case of nil tax liability.
For example, if you earn FD interest of Rs.50,000, the bank would deduct 10% TDS i.e. Rs.5,000 and deposit it to the government. While reporting the interest income in ITR, you have to report the entire interest earned of Rs.50,000 in your ITR and claim the TDS deducted by the bank of Rs.5,000 as a TDS refund or tax credit from the outstanding liability, as the case may be.
TDS on Recurring Deposits (RDs)
Recurring Deposits are deposits made on a recurring basis. For example, a Rs.10,000 per month RD. Interest on RDs is completely taxable according to your tax bracket. Senior citizens, on the other hand, are exempt from tax on the interest income from RDs/FDs up to Rs 50,000 per year. TDS provisions on RDs are the same as TDS provisions on FDs. Banks deduct tax at source at the time of crediting interest to your account if the amount of interest is beyond Rs.40,000 for individuals other than a senior citizen (in the case of senior citizen, the threshold is Rs.50,000).
How to Calculate Tax on Interest Income?
Add the interest income to your total income in your Income Tax Return each year (even though, it may not be paid out). Interest income is to be reported under the head ‘Income from other sources’ while filing ITR. See which tax slab rate you fall into.
The income tax department will adjust the TDS (which has already been deducted) against your final tax liability.
If the bank does not deduct TDS from your interest income, the total interest income earned from your fixed deposits in a particular financial year is to be added to your total income and pay tax on it.
It is not advisable to wait until the maturity of your FD when interest is actually received– to report the interest income. This is because the accumulated interest may push you up to a higher slab, and you may end up paying more tax.
You can view the details of TDS deducted on any of your income by viewing your Form 26AS and total interest from FDs, RDs & savings bank accounts from yourAIS.
Let’s understand this by way of an example:
- Ritwik falls in the 20% tax bracket. He has 2 Fixed Deposits with a bank of Rs.1,00,000 each for a period of 3 years @ 6% interest per annum. In the first year, Ritwik’s interest income is Rs.6,000 from each of the FDs, total interest accrued is Rs.12,000 in the first year. The bank does not deduct TDS for annual FD interest below Rs.40,000.
- Another example, Mr. Anurag has a fixed deposit of Rs.10 lakh at an interest rate of 6% p.a. He receives an annual interest of Rs.60,000. The bank deducts TDS on the whole of Rs.60,000 at 10% i.e.Rs.6,000. The prescribed rate of TDS is 10%.
When to Pay Tax on Interest Income?
If there is a tax liability on adding interest income to your total income, then the same is required to be paid while filing your income tax return for the financial year. This is how you can pay any tax that is due.
However, if the tax payable after the inclusion of your interest income in your total income is more than Rs.10,000 – then you are liable to pay Advance Tax. Hence the rules of quarterly payment of advance tax in instalments are to be complied.
Understanding TDS on Interest on FDs
When does the bank not deduct TDS
If your interest income from all FDs with a bank is less than Rs.40,000 in a year, the bank cannot deduct any TDS. The limit is Rs.50,000 in the case of a senior citizen aged 60 years and above. It is governed by section 194A of the Income Tax Act.
Prior to Budget 2019, the limit of TDS on interest income was Rs.10,000.
When does the bank deduct TDS @ 10%
The bank estimates your interest income for the year from all the FDs you have with the bank. There would be a 10% TDS deduction if your interest income exceeds Rs.40,000 (Rs.50,000 in the case of senior citizens). Prior to Budget 2019, the limit of TDS on interest income was Rs.10,000.
The threshold limit to make TDS on FDs is as below
Interest paid | Threshold limit | |
Senior citizen (Rs.) | Other person (Rs.) | |
Co-operative | 50,000 | 40,000 |
Co-operative engaged in the banking business | 50,000 | 40,000 |
Primary Agricultural Credit Society | 50,000 | 40,000 |
Co-op. Land Mortgage Bank | 50,000 | 40,000 |
Co-op. Land Development Bank | 50,000 | 40,000 |
When does the bank deduct TDS @ 20%
In case you do not provide your PAN information to the bank, they will deduct 20% TDS. So make sure that the bank has your PAN details.
When your overall income is less than Rs.2.5 lakh
No TDS is deductible when your total income is less than the minimum taxable amount. Some investors may have more than Rs. 40,000 in interest income in a year, but their total income (including interest income) is less than the minimum exempt income (Rs.2.5 lakh for FY 2019-20).
When there is no tax payable by the individual, the bank cannot deduct TDS. However, in such cases, the bank will not deduct TDS only where you submit Form 15G or 15H to claim interest income without TDS.
How to ensure zero TDS deduction by the bank
The only way to make sure that no TDS is deducted by the Bank is when your total income is not subject to tax and you submit Form 15G and Form 15H to the bank before the due date.
Submit these forms at the beginning of each financial year to avoid the whole hassle of additional TDS deduction and subsequent refund from the IT Department.
Interest from FD for Senior Citizens
Senior citizens receiving interest income from FDs, savings accounts and recurring deposits can avail of income tax deductions of up to Rs.50,000 annually. This is by way of an amendment vide Finance Act 2018.
Please read the detailed article on this here, where we discuss the provisions of section 80TTB. 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.
Income Tax on Fixed Deposit Interest for a Housewife
I am a homemaker. I have invested Rs.5 lakhs in a bank FD in which I am getting interested after tax deduction(TDS). Do I need to file my tax return? Can I submit Form 15G to the bank if I have no other income? How to get back the refund of the tax deducted?
Banks and other financial institutions deduct tax at source(TDS) before paying you the interest income on FD.
You will have to file an income tax return if your total income exceeds thebasic exemption limit. If not, you will not be required to pay tax. If, however, tax is deducted from your income, you can claim a refund while filing your return.
Forms 15G and 15H can be submitted to receive interest without tax deduction, but your income should be below the basic exemption limit of Rs. 2.5 lakhs or Rs.3/5 lakhs, respectively, and the tax payable should be zero.
Form 15G is to be submitted by people below the age of 60 years, and Form 15H by people of 60 years or more.
- If your age is 80 years or more:You can file Form 15H only if your taxable income is less than Rs.5 lakhs.
- If your age is 60 years or more but less than 80 years: If you are a senior citizen, you can file Form 15H only if your taxable income is less than Rs.3lakhs.
- If your age is less than 60 years:If you are not a senior citizen, you can file Form 15G only if your total income is not more than Rs.2.5 lakhs.
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