Is fixed deposit interest income taxable and when does it have to be paid?

Fixed Deposits (FDs) have been a great investment tool for years. They offer assured returns, the investment risk is low, and you are well aware of what you will be earning before even investing. So, they are an ideal and essential part of every financial plan.

A point that you need to remember here is that the interest you earn from an FD is taxable. So, as a potential investor, you must know the tax on fixed deposits in detail and then plan your investment to avoid future complications.

How the interest income of an FD is taxed?

As specified above, the interest you earn on your FD is fully taxable, as it is part of your total income tax liability for a year. Now, to do that, the income from here, which essentially comes under the ‘income from other sources’, is clubbed with your annual income from the primary source. Now, based on this, your final income tax slab is decided.

After that, when you file your income tax, the Income Tax Department will adjust the taxes paid beforehand and determine your total taxable income. If you have not paid your taxes already, the total earning from your FDs beyond the exemption limit will come under taxation. 

A pro tip to remember here is that it is ideal to declare your interest income every year and not wait till maturity. Otherwise, the total interest income may push your income and take you to a higher income tax slab.

Moving ahead, since interest income from an FD comes under the ‘income from other sources’, it also comes under the purview of Tax Deducted at Source (TDS). However, there are a few pointers that you need to know regarding this –

  • If you want to avoid the TDS deduction of your FD, you need to submit either form 15H or 15G to direct the bank not to deduct TDS on the interest.
  • If your total interest income from all the FDs is less than Rs 40,000 (Rs 50,000 for senior citizens), then the bank will not deduct any TDS.
  • Otherwise, the financial institution will charge a TDs of 10%, and if you do not have a PAN card, it will be 20%.
  • Furthermore, the financial institution will not deduct any tax on your FD income if your total annual income is less than Rs 2.5 lakh. However, you need to submit Form 15G or 15H for this to claim any deductions that have been made.

Apart from these, another crucial point to remember is that the TDS on FDs is deducted during the interest credit and not when the deposit matures. Therefore, if you have an FD of 4 years, the financial institution will deduct the TDS at the end of each financial year.

Are you confused by all the jargon and thinking everything is too complicated? In that case, let’s simplify the whole process with an example.

A man named Mr. A has three fixed deposit accounts earning Rs 10,000, Rs 12,000 and Rs 15,000 per year. This means his total interest income in a particular year amounts to Rs 37,000. So, his total income from FD remains under the Rs 40,000 threshold, resulting in no TDS deduction.

However, Mr. A has made another recent deposit which gives a total interest output of Rs 20,000. So, when he calculates the total interest income next year, it will shoot up to Rs.57,000, and he will be liable to pay 10% TDS.

Now, the interesting point here is that Mr. A does not need to pay taxes on Rs.57,000; instead, he has to pay taxes on the exceeding amount, which is Rs 57,000 – Rs 40,000 = Rs 17,000. Hence, his total tax liability will be Rs 17,000 x 10% = Rs 1700.

When to pay tax on the earnings of FDs?

If your total income from the FDs comes under taxation, you need to pay it with your annual ITR filing before the 31st of March of every financial year. However, if your total taxable income is over Rs 10,000, you can take advantage of advance tax payments and pay the taxes quarterly.

Hopefully, now you have clarity regarding the calculation of taxes on the interest you earn from FDs and when to pay the same. But, if you want to reduce your income tax, you can invest in tax-saving FDs.

What are tax-saving FDs?

Tax-saving FDs are a type of FD that enable you to earn income tax deductions. As per Section 80C of the Income Tax Act, you can get up to Rs 1.5 lakh deductions when invested in a tax-saving FD.

This deposit functions like any other FD, where you invest the amount for pre-set tenure and interest rate and get the benefits when it matures. However, two significant differences exist between a regular FD and a tax-saver FD.

The first one here will be the tenure. For tax-saving FDs, the minimum investment tenure is five years. After that, you can increase it per the financial institution’s policies. The minimum investment amount here is bank-specific and changes from one to another.

Another significant difference here is the facility for premature withdrawal. In this case, you are not allowed to withdraw the deposit before the completion of the tenure. However, if you do that, you will have to return the income tax benefits earned through it.

Final words

Hopefully, now you have a clear idea of the taxation of FDs and when you need to pay it and how to do it. Also, with tax-saving FDs, you can reduce tax liabilities by making additional investments. So, consider all your options and then make an informed decision that will ensure your financial benefits.

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