Investing in bank fixed deposits (FDs) is no doubt one of the safest and oldest means for individual investors to park their surplus funds and thereby earn regular interest income. And that’s the reason more than 95% of the households prefer to park their money in bank deposits while less than 10% opt for investing in mutual funds or stocks as per SEBI’s Investor Survey published in April 2017. However, not many are aware how FDs are taxed. Here’s a list of a few things investors should keep in mind while investing in FDs from the income tax perspective:
1) Section 80C Benefit: Many investors have a general belief that FDs only generate regular interest income and remain unaware about tax benefits. Section 80C of the Income Tax Act provides that investment by an individual or HUF in a Bank FD in a scheduled bank for a minimum tenure of 5 years is eligible for deduction subject to a maximum of Rs 1,50,000. However, all FDs are not eligible for 80C deduction unless the investor specifically opts for such tax-saver FDs. Hence, FDs too act as a tax-saver instrument. Therefore, one should keep this in mind while doing his one’s tax planning. Any premature withdrawals and loans against these FDs are not allowed. Also, in the case of joint holder of deposit, benefit of Section 80C is only allowed to the first holder of deposit.
2) Interest Income: Interest income on FDs are taxable under the head income from other sources on the basis of annual accrual or receipt depending upon the method of accounting followed by the investor. However, interest income on fixed deposits with banks up to Rs 50,000 earned by a senior citizen is now exempt under Section 80TTB of the Act.
3) TDS on Interest Income: Banks deduct tax at source @10% on interest income accrued on the deposits and pay or credit net interest income to the depositor. Here care needs to be taken by the depositor to take appropriate tax credit while filing return of income. Sometime taxpayers declare interest income on receipt basis. In that case investors should carry forward unclaimed tax credit in their return of income to subsequent year for claim in the year when such income will be taxed on receipt basis.
4) Checking TDS Deposited With Govt: In order to check whether the tax deducted has been correctly deposited with the government, it is advised to periodically log in with the Income Tax Department’s e-filling website to check TDS credit under his/her PAN by viewing Form 26AS. Form 26AS gets updated on quarterly basis as and when the deductor of TDS files his/her TDS return. In case of any mismatch in tax credit, investors should approach the banks to resolve the mistake. It is also advisable to ask for TDS certificates in Form 16A from the banks in respect of tax deducted.
5) Form 15G/ Form 15H Benefits: If an investor is earning income in the nature of interest (e.g. interest on bank deposits or loans) and the estimated total income including such interest income is likely to be less than the basic exemption limit (e.g. Rs 3,00,000 for senior citizen and Rs 5,00,000 for very senior citizen), he can make an application in Form 15G or Form 15H to the payer of interest and accordingly, no tax shall be deducted on such interest income.
(By Ashok Shah, Partner– Direct Tax, and Ujjval Gangwal, Qualified Associate–Direct Tax, N.A. Shah Associates LLP)