Explained: Your Taxation & Fixed Deposit Returns

Assured returns on fixed deposits (FD) make more individuals invest their hard-earned money for assured returns. However, depositors need to pay taxes on their earnings from investments, including FDs. And so, investors look for ways to save taxes on returns from their FDs. For effective financial planning, you can use fixed deposit calculators and estimate the interest earned to calculate taxes upfront. This post explains how a tax on FD interest is calculated. Also, you can find helpful tips on tax savings on FD returns. 

Tax on Fixed Deposit Interest

• The principal amount of the FD is not considered for tax calculation. Only the interest you earn on your FD investments is taxable. The interest income is added to your total income in a financial year and gets taxed as per the applicable slab rate.

• When crediting it to your FD account, the FD issuer deducts tax at source (TDS) on the accrued interest. It means that the TDS is deducted when the interest gets credited and not after completing the FD tenure. If you hold cumulative FD with a maturity period of two years, you will receive accumulated interest at the end of maturity, but the bank will deduct TDS at the end of each financial year.

TDS Rates for Different Investors 

• An Indian citizen needs to pay TDS @10% if their total interest income exceeds Rs. 40,000 in a financial year, under section 194A, Income Tax Act, 1961. Senior citizens need to pay taxes if the interest income exceeds Rs. 50,000 (under Section 80 TTB). The Primary FD account holder is liable to pay TDS if it is a joint FD account. It is important to know that TDS will be deducted @ 20% if the taxpayer neglects to provide their Permanent Account Number (PAN) details.

• NRI depositors need to pay TDS @30% on the interest earned from NRI FDs under Section 195 of the Income Tax Act, 1961.

When Individuals Need Not Pay TDS?

The deduction only applies if the depositor’s income falls under a taxable bracket. If your total income does not exceed the minimum taxable income, you are not liable to pay TDS. Even if your interest income is above Rs.40,000, no TDS will be applicable. 

Illustrations 

• The income of Mr X falls under the tax slab of 20%. He has invested funds in two FDs, each Rs.1 lakh, for a lock-in period of three years. The applicable Fixed deposit interest rate is 7% per annum. For the first year, his interest income is Rs.7000 from each FD, and he is drawing Rs.14,000 in a financial year. No TDS will be applicable as the interest income is less than Rs.40,000.

• Mr Y has an FD of Rs.10 Lakhs with one year tenure. The FD interest rate is 7% per annum. The interest accrued is Rs.70,000. TDS will be applicable at @10% on 70,000, and the bank will deduct Rs.7000 as TDS before crediting your account at maturity.

You can use fixed deposit calculators to calculate interest manually.

How to Save Taxes on FD Investments – TDS/Tax Waiver? 

If your total income is less than Rs.2.5 lakhs in a financial year that does not fall under any income tax bracket, then you can submit Form 15 G/H. 

• Form 15H applies to senior citizens above 60 years, and Form 15G applies to non-senior citizens. Submitting these forms at the beginning of the financial year is necessary to ensure that no TDS will be deducted from your interest income if not applicable. Despite submitting these forms, if the bank has deducted TDS, you can file your Income Tax Return (ITR) to claim a refund.

• Tax-saving FDs offer tax benefits to individuals. You can claim a deduction of up to Rs.1.5 lakhs in a year. You should know that, still, your interest income will attract TDS.

This way, you can calculate your taxes on FD returns. Knowing your FD returns in advance is good practice using fixed deposit calculators. Based on these estimated returns, you can invest in multiple FDs to split the interest income in two financial years and reduce taxes. Thus, invest to earn at a fixed FD interest rate and move a step ahead towards your dreams.