Fixed deposits (FDs) are uncomplicated risk-free interest-yielding term deposits offered by banks in India. They are considered as one of the safest and most common investment options. The interest income earned from fixed deposits, however, has certain tax implications which are being discussed here.
How is interest income on FD taxed?
Interest income from FDs is taxable as “Income from other sources” under the provisions of the Income-Tax Act, 1961 (the Act). Banks may deduct taxes at source at 10% on interest income if the amount of interest is likely to exceed Rs 10,000 in a year.
# However, if a declaration either in writing or in electronic mode in Form 15G (by a person other than Company or Firm) / 15H (by resident individuals above 60 years) is furnished to the bank affirming that tax on estimated total income during the financial year in which the interest income is to be included to tax would be nil, then no taxes would be deducted at source in such cases even if the income exceeds Rs 10,000.
# TDS at higher rates is deductible in case Permanent Account Number (PAN) is not furnished to the banks. In case of non-residents, TDS on interest income is deductible @ 30% plus additional surcharge and cess.
# If an individual has to pay higher rates of taxes based on his estimated income, then the remaining taxes on the interest income (after considering TDS by the bank) should be paid by means of advance tax / self-assessment tax.
# If an individual has not submitted Form 15G / 15H and as a consequence the bank has deducted TDS on interest income, the individual is eligible to claim refund of taxes so deducted by filing income tax return.
Tax deduction benefits on fixed deposits
An individual can avail tax deductions up to Rs 150,000 on the investments made in fixed deposits if the same is made in a scheduled bank for a period of not less than five years.
Further, senior citizens can avail tax deductions up to Rs 50,000 from the financial year 2018-19 with respect to interest income from fixed deposits under section 80TTB of the Act.
(By Akhil Chandna, Director, Grant Thornton India LLP, with inputs from CA Ridhi Sanghvi)