Updated on: 13 Jun, 2020 02:22 AM

Contents

What is a Fixed Deposit?

A fixed deposit is a lumpsum investment having fixed tenure to maturity. You can open a fixed deposit with any bank or financial institution. It is a safe investment having a predetermined interest rate, which is a little higher than saving accounts. Since the time period of investment is fixed and no premature withdrawals are permissible it is also known as term deposits.

What is the Taxability of Interest Income?

The interest from fixed deposits is fully taxable. It comes under the head “Income from Other Sources” while filing an income tax return. In case of fixed deposits, the bank or financial institutions deduct tax at source at the end of each year when the interest is paid by them. The rate of tax deduction at source is 10% if the income from interest for each year exceeds Rs 10,000. [This limit has been increased to Rs 40,000 in Budget 2019]. However, if you don’t submit your PAN card, TDS @ 20% is deducted on your interest income. Any amount deducted as TDS can be verified with Form 26AS. The TDS can be deducted at the time of calculating taxable income or while paying the self-assessment tax to the Government.

For example- If Mr X has a fixed deposit for 5 years, and has earned an interest of INR 50,0000 every year.So the bank is required to deduct TDS on the interest amount @10% as the interest amount exceeds INR 40,000.

Don’t want your TDS to be deducted? Click here to read.

What if TDS is not deducted?

Even if TDS is not deducted every year, Add the interest income in your total income. Because if you don’t, then in the last year(i.e.5th Year), consequences will be –

  • You get income tax notice for not reporting your income.
  • The year in which it is added puts you in a higher tax slab thus resulting in higher tax payment.

Let me explain you with an example-

Suppose Aakriti has an income of Rs. 9.5 Lakhs. hence she belongs to the 20 % tax bracket. she has an FD of Rs 2 lakh with a bank that gives her an 8 % interest per annum. So, the interest she earns on the FD for the current financial year is Rs 16,000. (Remember, banks tax FDs at 10 percent only.)

Now, Aakriti is liable to pay tax on the interest she earns at the same tax rate as she pays for her gross income.

Hence, total tax Aakriti needs to pay on interest earned is :
20% of Rs 16,000 = Rs 3,200
The bank deducts TDS of 10% on interest income:
= 10%of Rs 16,000 = Rs 1,600
Therefore, the balance tax payable by Aakriti is 3,200 – 1600 = Rs 1,600
So, Total tax Aakriti needs to pay extra Rs 3200 .

Interest from FD for 5 years will be:

Rs. 16,000 * 5 = Rs. 80,000
Interest is taxable whether you pay it yearly or not.
Before, Aakriti was showing an income of Rs. 9,66,000 every year.
But in case if she hadn’t been paying taxes on her interest income, then after the maturity period of FD her income will be Rs. 10,30,000.
So this added value leads her into the 30% tax bracket. This means she will have to pay more tax.
Hence the addition of such a large amount in the 5th year would result in more income tax payment.

What are the situations in which TDS is not required to be deducted?

The TDS (or tax) on fixed deposit interest shall not be deducted in the following cases:

  • If you are a senior citizen and the total interest amount does not exceed Rs 50,000 for the financial year.
  • You have opened a Fixed Deposit account in a Post Office.
  • If you have NRE (Non-Resident External) or FCDR (Foreign Currency Non-Resident) FD.

When is tax on interest income payable?

If the income of interest is to be included in the total income, the tax must be paid before 31st March or end of the financial year you can say. In case there is a large amount of income from interest, the tax is paid in the form of advance tax that is to be paid on a quarterly basis.

Important Notes:

  • In case the depositor does not give information regarding PAN, the tax deduction at source done by the bank is at the rate of 20 % per annum.
  • If the overall income of the depositor is less than Rs 2.5 lakh but the income from the interest of fixed deposit exceeds Rs 40,000, the bank can not deduct tax deduction at source from his interest ( No tax deduction at source is allowed if total income is less than Rs. 2.5 lakh).
  • To avoid additional tax deduction at source by the bank or refund from IT department you should submit Form 15G and Form 15H to the bank at the beginning of each financial year.
  • In case of interest from fixed deposits for senior citizens tax exemption is Rs 50,000 per annum under section 80TTB.
  • In case of interest from fixed deposits for Non-Resident Ordinary(NRO) Tax Deduction at Source (TDS) is charged at the rate of 30 %.
  • In the case of Non-Resident External(NRE) or Foreign Currency Non-Resident (FCNR), fixed deposits are tax-free, so no Tax Deduction at Source (TDS) is charged.
  • Tax Deduction at Source (TDS) is not applicable on either Time Deposit (FD) or Recurring Deposit (RD) that are made with the post office.

How to save a little amount of tax on income from interest of fixed deposits?

  • Open fixed deposits with the names of your family members to avoid the tax burden of interest on the taxpayers.
  • Fixed deposits made at the right time of the year that is middle or closer to the end of the year may reduce the burden by the distribution of the tax in both the years.

Conclusion

The tax is applicable to the income from the interest on savings that are fixed deposits too. The tax is not paid directly to the Government, the bank itself deducts the amount of tax in the form of Tax Deduction at Source (TDS) if tax is applicable on the interest income of the depositor. This tax deduction can be deducted while the tax return is filed by the taxpayer.

Frequently Asked Questions

Q- Is income from interest on fixed deposit is taxable?

Yes, income from interest on fixed deposits is taxable under the head income from other sources.

Q- Tax is deducted by the bank at what rate for a fixed deposit?

Tax is deducted in the form of Tax Deduction at Source (TDS) by the bank for interest income from fixed deposits. The rate of tax deduction at source is 10 % if the income from interest for each year exceeds Rs 40,000. If the interest income is below Rs 40,000, no Tax Deduction at Source (TDS) is deducted by the bank.

Q- Do all interest income from fixed deposits are liable for taxation?

No, only if the income from interest exceeds Rs 40,000 per annum(as amended in Finance Budget 2019) the Tax Deduction at Source (TDS) is applicable. Otherwise, no tax is deducted on the interest income from fixed deposits.

Q- How to calculate tax on interest income?

The taxpayer only needs to deduct tax deduction at source done by the bank for his interest on fixed deposit while filing a return for income tax. The bank will deduct tax on his own while giving interest to the depositor.

Q- When is tax deduction at source chargeable in case of a fixed deposit?

When the income from the interest of a fixed deposit is less than Rs 40,000 in a year, tax is not applicable. When the income from the interest of a fixed deposit exceeds Rs 40,000, the bank or financial institutions deducts tax at source in the form of tax from the depositor. The bank deducts tax deduction at source at the rate of 10 % per annum if PAN details are furnished and 20% otherwise.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of File My Tax online.in. File My Tax online is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.