• Fixed Deposits and Income Tax

    Published on September 21 2018

    A fixed deposit is an investment option that is widely used by Indians and has proven to be a secure haven for hard earned funds. India has a variety of fixed deposit schemes across banks and companies alike. Lock in Fixed Deposit accounts are high income gaining with higher rates of interest. Reserve Bank of India (RBI) has granted banks freedom to offer better privileges to depositors opting for lock in fixed deposits.

    Opening a fixed deposit account can be broadly compared to lending a bank money, upon which it pays the depositor interest at a pre decided rate.

    Income Tax is a tax imposed on financial income accrued by a person and is levied by the government. Under the Indian law, businesses and individuals are subject to payment of regular Income Tax.

    Interest accrued on Fixed Deposits are also considered as financial income and hence are considered taxable. There are a few exemptions from Income Tax as per the Section 80C of the Income Tax Act, 1961 in relation to investments like, fixed deposits, etc.

    Interest earned on a fixed deposit account goes tax free until a certain threshold, after which it is charged as per the current guidelines of the Income Tax Act.

    Fixed Deposits and Income Tax

    What is the correlation of fixed deposits with income tax?

    In simple terms, those who make investments into financial tools like tax saver fixed deposit accounts can have their tax deducted at source. Furthermore, a fixed deposit account can be declared while filing income tax returns. This ensures that lesser tax is deducted and hence better returns are earned annually by the depositor.

    Tax deducted at source becomes applicable when the depositor exceeds the cap of Rs.10,000 of interest earned in a financial year of a fixed deposit account held at a branch.

    Tax deducted at source or TDS is deducted with every payment that the bank make towards an account that is earning over Rs.10,000 as interest.

    Furthermore, TDS is deducted even if the amount has not yet been paid to the account holder physically. Accrued interest is tax deductible.

    How can TDS be avoided with fixed deposit account?

    A suggestion towards avoiding TDS would be splitting the fixed deposit amount that you have into different accounts across different branches. This should be done ensuring that the interest earned by each account does not exceed Rs.10,000.

    Choosing the time and tenure of the fixed deposit account with the view of dividing the interest accrual between two financial years aiming to not cross Rs.10,000 also would help avoid TDS.

    Tax Saver Fixed Deposit Schemes

    A tax saver fixed deposit is a scheme that is awarded by most to customers who opt for longer tenures for their fixed deposit accounts. According to Section 80C of the Income Tax Act, 1961, fixed deposits that are booked by individuals or by Hindu Undivided Family for 5 years and up to Rs. 1 Lakh are exempt from Tax deducted at source. Moreover, interest rates on tax saver fixed deposits are calculated on a quarterly basis. The interest thus accrued is reinvested into the fixed deposit account.

    TDS Refunds

    In the case that tax liability of a depositor is non-existent and yet the bank concerned has deducted tax at source on the interest earned on the fixed deposit account, then, a refund claim can be filed during the filing of income tax returns. This can be done by submitting Form 16A to the Income Tax department. The refund will be provided based on the PAN number mentioned on the Income Tax website under Form 26AS.

    Top 5 Tax Saver Fixed Deposits in India

    Following are top 5 tax saver fixed deposits offered in India for tenures of 5 years and above-

    • Lakshmi Vilas Bank offers tax saver fixed deposit accounts at interest rate of 6.25% p.a. for general citizens & 6.75% p.a for senior citizens.
    • SBI offers tax saver fixed deposit accounts at interest rate of 5.30% p.a. for general citizens & 5.80% p.a for senior citizens.
    • Bank of Baroda offers tax saver fixed deposit accounts at interest rate of 5.60% p.a. for general citizens & 6.60% p.a for senior citizens.
    • HDFC Bank offers tax saver fixed deposit accounts at interest rate of 5.75% p.a. for general citizens & 6.50% p.a for senior citizens.
    • PNB offers tax saver fixed deposit accounts at interest rate of 5.30% p.a. for general citizens & 6.30% p.a for senior citizens.

    Frequently Asked Questions (FAQs)

    1. Do senior citizens have to pay income tax on fixed deposits?

      Senior citizens can avail up to Rs.50,000 as income tax deduction annually from the interest income they receive from their fixed deposit accounts, recurring deposit accounts, and savings accounts. This means that the bank will not deduct Tax Deducted at Source (TDS) from a senior citizen if the interest income from all the fixed deposits combined with the bank is not more than Rs.50,000 in a financial year.

    2. If my income is below the taxable limit, will I have to pay TDS on my fixed deposit interest?

      If your income is below the taxable limit, you can avoid TDS on your FD interest by filing Form 15G (for those below the age of 60) or Form 15H (for those above the age of 60).

    3. If I have more than one FD with a bank, will TDS be deducted from just one FD or from all?

      TDS is deducted from the interest income earned from all the FDs that are held with the bank. However, TDS on FD interest income is only applicable if the interest from all FDs held with the bank exceeds Rs.40,000 in a year. The TDS deducted in 10% in that case. For senior citizens, the maximum limit of interest income for which TDS is not deducted is Rs.50,000.

    4. Is the TDS on FD interest deducted only when the FD reaches maturity?

      TDS on the interest earned on a fixed deposit is deducted at the time that the interest is credited to the linked savings account and not only when the FD account matures.

    5. If TDS has not been taken from the interest income on FD, should it be included in income tax returns?

      Yes, even if TDS is not taken from the interest income on your FD, you should include the interest income from the FD into your total income and pay income tax on it. The TDS will be adjusted by the Income Tax Department against the final tax liability.

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