Finance

What Is The Tax Deduction On Fixed Deposits?

Fixed deposits are among the most popular investment options in India, primarily because they are considered risk-free and easy to use. In a fixed deposit scheme, you invest a fixed sum for a certain number of years, and you earn interest on your investment amount. 

The interest can be fixed, where you get your interest along with the principal investment when the FD matures. Or you can opt for compounding interest, where the interest is paid out to you at fixed intervals, and you get your principal investment upon maturity. 

In addition, an FD is a safe investment to opt for and can be opened for anyone, from senior citizens to minors. It also gives you a higher interest rate when compared to your savings account. 

However, the important factor to consider with every FD scheme is that you have to pay tax on your interest income. Read on to understand what this tax is and how much of it you need to pay under any fixed deposit investment.

What Is Tax Deduction On Fixed Deposits?

Any interest income you get from your FD is fully taxable in India. If the total interest from all your FDs amounts to Rs. 40,000 for any individual or Rs. 50,000 for senior citizens, the bank will deduct TDS (tax deducted at source) from your interest before crediting the amount to your account. 

If the bank does not deduct TDS, the interest on your fixed deposit in a year becomes a part of your annual income under “Income from Other Sources.” 

How To Calculate TDS On Your Fixed Deposits?

Let’s understand how TDS is calculated on an FD with an example.

Mr. Raj, a 45-year-old individual resident of India, has two fixed deposits with a bank, each amounting to Rs. 100,000 at an interest rate of 7% per annum. In the first year, the income from the FDs is Rs. 7000 from each FD, which totals Rs. 14,000. 

Since this is below the 40,000 interest mark, the bank will not deduct any tax on the interest income. 

However, if Mr. Raj had an FD of Rs. 10,00,000 with the same interest rate of 7% per annum, his interest income would be Rs. 70,000 in the year, and the bank would deduct TDS at 10% on the interest earned by him.

How To Avoid TDS On Your Fixed Deposits?

Every taxpayer has to declare income from fixed deposit interest mandatorily. However, you can reduce the tax burden on your FDs in the following ways: 

Self-Declaration

If the interest on your FDs is below the taxable limit, you can submit form 15H for senior citizens and form 15G for everyone else to your bank at the start of each financial year.

PAN Card

Always submit your PAN card to the bank when creating the FD. This way, if your FD interest is taxable, it will carry a TDS of 10%, as opposed to a TDS of 20% if your PAN is not submitted to the bank.

Tax-Saving FDs

Another option to save tax on your FDs is to invest in a tax-saving FD scheme. In this type of fixed deposit, you can claim a tax deduction under section 80C of the Income Tax Act. Here are some requirements of a tax-saving FD account.

  • It has a lock-in period of 5 years
  • It has among the highest fixed deposit interest rates, at around 5.5 to 7.5%
  • The maximum deduction for a tax-saving FD is 1.5 lakhs
  • Interest earned on your FD is still eligible for TDS

Manage Your Investments

If you manage your investments in a way that the total income doesn’t exceed Rs. 10,000 in a year. For example, you could invest in an FD for one year in November, so it will be split between two financial years since the financial year ends on 31 March. 

To Conclude

Fixed deposits are a simple, easy, and safe option to invest and grow your money. It is a flexible investment that, in addition, also allows you to avail yourself of short-term loans during emergencies. The option of tax deduction is available when you have a fixed deposit, but it differs based on age and other factors. Make sure to do your research before you apply for those.

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