As a potential investor in fixed deposits, it is advisable for you to know how these returns might be taxed by the government and whether any tax benefit exists on investment in FDs.
Fixed deposit has been the answer to the financial needs of many individual investors, especially senior citizens, looking for a low risk-return profile for their investments and security from capital erosion.
However, as a potential investor in fixed deposits, it is advisable for you to know how these returns might be taxed by the government and whether any tax benefit exists on investment in fixed deposits (FDs).
Taxation of interest from Fixed Deposits
Fixed deposits are a great way for you to protect savings from inflation and also provide low-risk returns in real (inflation adjusted) terms. However, fixed deposit interests contribute to an increase in your income. Hence, the overall returns you earn from a fixed deposit account are liable to be taxed under income tax laws, just as your regular income would be. Under income tax laws, fixed deposit returns are taxed under the head ‘Income from other sources’.
The income you earn through fixed deposits is essentially included with your total income for the year. The resultant amount then determines which tax slab you fall under. So, assuming your interest from fixed deposits was Rs 10,000, the same may be taxed as high as 42.74% or may not be taxed at all depending on your level of total income for that year.
Senior citizens receiving interest income from fixed deposits, savings account and recurring deposits can avail income tax deduction of up to Rs 50,000 annually. This is a flat deduction available to them over and above the benefits that they may have if their total income does not exceed the taxable threshold.
TDS on interest from Fixed Deposits
Tax Deducted at Source (TDS) is a mechanism by which the payer of any specified income (including interest) deducts tax on behalf of the payee at the time of making payment and deposits the same with the government on the payee’s account. The payee can then adjust this TDS against his total tax liability or even claim refund if the amount of TDS deducted is more than his total tax liability.
TDS is automatically levied on your fixed deposit by the bank in which you have your FD account. Therefore, the overall taxes on your fixed deposit returns are paid partly through your income tax filings and partly through TDS. However, TDS is deducted by the bank only if your fixed deposit returns exceed Rs 40,000 (Rs 50,000 for senior citizens) in a year. If they exceed Rs 40,000 (or Rs 50,000 as the case may be) and you provide the bank with your PAN, the TDS deducted by the bank on your fixed deposit income is 10%. If you do not provide the bank with your PAN, the TDS deducted by the bank on your fixed deposit income is 20%. Also, no TDS is deductible when your total income is less than the minimum taxable amount.
Some investors may have more than Rs 40,000/50,000 interest income in a year, but their Total Income (including interest income) is less than the minimum exempt income. When there is no tax payable by the individual, the bank cannot deduct TDS. However, in such cases, the bank will not deduct TDS only where you submit Form 15G or 15H to claim interest income without TDS. Form 15G (for non-senior citizens) and 15H (for senior citizens) should ideally be submitted at the beginning of each financial year to avoid the whole hassle of additional TDS deduction and subsequent refund from the Income Tax Department.
Interestingly, no TDS is deducted on either fixed deposits or recurring deposit made with a post office in India.
Tax benefits on investment in Fixed Deposits
An individual can claim deduction up to Rs 1,50,000 in a financial year (under the popular Section 80C of the Income-Tax Act, 1961) for investments made in tax-saving fixed deposits. The amount so invested is deducted from gross total income to arrive at the net taxable income. However, these deposits will have a lock-in of 5 years and pre-mature withdrawals are not allowed.
(By Gouri Puri, Partner, and Nimish Malpani, Associate at Shardul Amarchand Mangaldas & Co)
Disclaimer: The views expressed by the authors are personal and do not represent the views of the firm.