TDS on Fixed Deposits (FDs)

TDS, known as Tax Deducted at Source, is the tax that is deducted from the interest earned on FDs, if they fall in the taxable category. FDs may remain to be one among the most safe and popular investment options among traditional investors and senior citizens but not many people still know about the tax aspect when it comes to term deposits. Whether a customer is investing in a fixed deposit at a bank or NBFC, TDS will be applicable in both cases. It is very important for those who have an FD and those who plan to invest in one, to know the various rules and regulations when it comes to TDS. The interest gained from such deposit accounts tend to be added to the total income and tax will be charged as per applicable rates. This income will be shown under the ‘Income from Other Sources’ section in an Income Tax Return (ITR) sheet.

Questions such as what is TDS?, how is TDS on FD calculated?, or how to avoid TDS?, are some of the most common questions that people ask when it comes to TDS on fixed deposits. Read on further, to understand more about all aspects about TDS on FDs.

Given below are the rules and regulations as far as TDS on FDs are concerned: 

• When is TDS applicable: TDS will be applicable only if the interest earned on an FD is more than Rs.10,000 in a given financial year, ie: from April 1 to March 31.
• TDS for senior citizens: For those who are 60 years or older, TDS will only be deducted if the interest income exceeds Rs.50,000 in a given financial year. Earlier, the limit was Rs.10,000 but this limit was increased to Rs.50,000 in the Union Budget 2018.
• Calculation of TDS: In most cases, banks or financial institutions will cut TDS at the rate of 10% on the interest that is earned, if it is more than Rs.10,000 in a year.
• When is TDS deducted at 20%: If the depositor fails to provide PAN card information at the time of applying or opening the FD account, then the bank or NBFC, will deduct TDS at the rate of 20%, which is 10% more than the standard TDS rate.
• TDS for joint account holders: In case of those who have a joint account, TDS will only be deducted against the primary account holder's PAN. Therefore, the secondary account holder will not be subject to tax treatment.
• Banks will automatically deduct TDS: The depositor does not have to pay TDS. The bank concerned will deduct it automatically by the end of the year.
• Fully taxable: The interest that is earned on a fixed deposit will be fully subject to tax if the income earned from the same goes beyond the set limit. Therefore, it is not the amount invested but the interest, which will be subject to taxation
• TDS is applicable on tax saver FDs too: The interest that is gained from a tax saver FD will also be fully subject tax. It is a misconception that TDS will not be applicable in the case of such deposits. But this is not true. The same rules are valid even to these tax saver term deposits.

How is TDS computed for a fixed deposit

To understand more about the TDS computation procedure, it is best to take a look at an example.

Lets say Prashanth holds 2 FDs - both for Rs.1 lakh. If he earns interest at the rate of 10.00% p.a for 4 years, the interest income in 1 year will be Rs.20,000 from both the term deposits. (Rs.10,000 from each FD). In such a case, TDS will be charged at the rate of 10% on the total interest income. Therefore, 10% of Rs.20,000, which is Rs.2000.

Avoiding TDS on Fixed Deposits: Tips

• Invest in the middle of the financial year: The most valuable tip that can be applied while investing in a fixed deposit is to choose the right time. If depositors make an investment in a term deposit scheme in the middle of the year, say in September, the interest earned will get divided into two financial years. In such cases, it is more likely that the interest income will not exceed Rs.10,000 and TDS can be avoided. This, however, depends on the amount that is being invested and the amount of interest that is earned.
• Submit relevant forms: For those who are not earning more than Rs.10,000 on their time deposits, a declaration form can be submitted to prevent the bank from deducting TDS. These forms are 15G and 15H form for Fixed Deposit Investments to avoid TDS . Form 15G is for those who are below 60 years of age, while Form 15H is specially meant for senior citizens.
• Invest across banks: Another great thing to do is to invest in a number of banks instead of putting all the money in a single FD in a single bank. This should be done in such a manner that the interest income from all these FDs, do not exceed the prescribed limit in a certain financial year.

FAQs

1.What is TDS?

Tax Deducted at Source or TDS is type of tax that is collected by the Income Tax Department of the government of India. Bodies that make payments to individuals are responsible to deduct a certain percentage and then make the payment.

2. What happens if I do not pay TDS?

TDS is not something that you will have to pay as far as FDs are concerned. It will be deducted from the interest income that is earned automatically by the bank or financial institution, where you are putting your money.

3. Will I be issued a TDS certificate?

Yes. All banks will send the depositor a detailed TDS certificate that specifically outlines the amount of deduction and the rate of deductions that are made.

4. Is it possible to ask the government for a refund if tax is deducted by mistake?

Yes, this can be done by filing income tax returns.

5. Is TDS applicable for those who are above 60 years?

Yes.

6. When is TDS deducted?

It is usually deducted at the end of a quarter or before paying the depositor. This system may vary from bank to bank.

7. Will a minor or a non-working spouse be subject to tax on a fixed deposit?

Yes.

8. Is it mandatory to declare interest income?

If interest income is not declared then there will be a discrepancy in your tax papers because the bank/NBFC will have already reflected the TDS deductions through your PAN.

9. Why is TDS deducted by banks?

It is mandatory as per prevailing tax rules for banks to deduct TDS before making a payment to depositors.