Understanding Income Tax on Fixed Deposit Interest.

Learn how FD interest is taxed, from tax slabs to TDS implications. Discover tax exemptions, deductions, and tips to minimize your tax liability effectively.

How Fixed Deposit Interest is Taxed

Understanding Taxable Interest

The interest you earn on FDs is considered as income and is taxable. It falls under the category of ‘Income from Other Sources’ in your tax return. The interest amount is added to your total income and taxed according to your income tax slab.

Tax Slabs and Fixed Deposit Interest

Old Tax Regime

New Tax Regime

Income Tax on Interest from Fixed Deposits

Taxability for Individuals

For individual taxpayers, interest income from FDs is fully taxable. It is added to your total income and taxed according to the applicable slab rates.

Special Considerations for Senior Citizens

Senior citizens (60 years and above) enjoy a higher exemption limit for FD interest. The exemption limit is ₹50,000, beyond which the interest is taxable.

FD Interest Tax Exemption Rules

Fixed Deposit Income Tax Exemption Limit

If your interest income from all FDs with a bank is less than Rs.40,000 in a year, the bank cannot deduct any TDS. The limit is Rs.50,000 in the case of a senior citizen aged 60 years and above. It is governed by section 194A of the Income Tax Act.

5-Year Fixed Deposit Tax-Free Limit

A common misconception is that 5-year fixed deposits are tax-free. This is not entirely true unless the bank specifically mentions it as a tax-saving FD. Always check the terms before investing.

How to Calculate Tax on FD Interest

To calculate the tax on FD income you can follow the following steps:

1. Add the total FD interest to your income under the head ‘Income From Other Sources’
2. Add remaining income under each head of income.
3. Deduct the tax allowances, deductions, and exemptions
4. Calculate the tax on total income as per applicable slab

Calculate Tax On FD Interest with this Calculator.

Tax Deducted at Source (TDS) on FD Interest

What is TDS on Fixed Deposit?

When you receive a payment, the person paying you needs to take out some tax before giving you the money. This tax is called Tax Deducted at Source (TDS), and the payer has to give this tax to the central government.

Similarly, banks also take out TDS when they add interest from a fixed deposit to your account. For most people, the bank takes out 10% TDS if the interest is more than Rs. 40,000. For senior citizens, the bank takes out 10% TDS only if the interest is more than Rs. 50,000.

What is the Exemption Limit for TDS Deduction on FD?

The rules for not deducting TDS on fixed deposits (FDs) are set by income tax guidelines. Currently, these rules say that:

• For most people, no TDS is taken if the interest from an FD is Rs. 40,000 or less.
• For senior citizens, no TDS is taken if the interest from an FD is Rs. 50,000 or less.

Also, if someone's total taxable income is less than Rs. 2.5 lakh, they don't have to pay TDS on their FDs.

Tax Benefits and Deductions Related to FDs

Section 80C and Fixed Deposits

You can get tax deductions of up to ₹1, 50,000 under Section 80C of the Income Tax Act of 1961 for your investment in a fixed deposit. However, to qualify for Section 80c deduction, you need to choose a lock-in period of at least five years. Moreover, you are also required to register your PAN card with your bank.

Exemptions and Specific Cases

1. Interest on NRE and FCNR Accounts:

NRE FDs (Non-Resident External Fixed Deposits):

• Taxation: Interest earned on NRE accounts is fully exempt from Indian income tax.

FCNR (B) FDs (Foreign Currency Non-Resident):

• Taxation: Interest earned on FCNR deposits is also exempt from Indian income tax.

2. Senior Citizen FDs:

• Tax Exemption: Senior citizens can claim a tax exemption on interest income up to ₹50,000 under Section 80 TTB of the Income Tax Act.

FAQs on Income Tax and FDs

Q. How much FD interest is tax-free?

A. Section 80TTA allows a tax deduction of up to Rs 10,000 against the FD interest to an individual taxpayer. Moreover, for a senior citizen, the tax free interest is much higher than for other individuals. Under section 80 TTB a senior citizen can claim a tax deduction of up to Rs 50,000 against FD interest income.

Q. How to calculate tax on FD interest?

A. Calculate taxable interest by subtracting any exemptions from the total interest earned.

Q. Is TDS applicable on all FD interests?

A. TDS is applicable if interest earned exceeds ₹40,000 (₹50,000 for senior citizens).

Q. Can I avoid TDS on FD interest?

A. Yes, by submitting Form 15G or 15H to your bank, you can avoid TDS deduction.

Q. What is the TDS rate on FD interest?

A. The TDS rate is 10% on interest income above ₹40,000 (₹50,000 for senior citizens).

Q. Is it necessary to show FD interest in ITR?

A. Yes, it is mandatory for every taxpayer to show their FD interest in the ITR. Usually, each taxpayer paying the FD interest will be reporting such FD interest in their TDS returns. The same information will be reported in the receiver’s Form 26AS. With the growing innovation and technology, the Income Tax Department can verify each detail in an income tax return.

Q. What is the tax deduction on FD interest for senior citizens?

A. The payer of the FD interest will deduct TDS at a rate of 10% if the total FD interest earned by the senior citizen is more than Rs 50,000 in a financial year.

Conclusion

Understanding income tax on fixed deposit interest is crucial for effective financial planning. By leveraging exemptions, tax-saving instruments, and proper tax filing, you can minimize your tax liability significantly. Remember, knowledge is power, and with the right approach, you can make the most out of your fixed deposits without worrying about hefty taxes.

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Author- Ayush Naik  

Ayush Naik is an expert in personal finance with an MBA in Finance. With over five years of experience working alongside stock market traders, Ayush has a deep understanding of market dynamics and investment strategies. His practical insights and analytical skills have helped many individuals navigate the complexities of financial planning and investment. Ayush’s professional background and commitment to educating others make him a valuable contributor to our personal finance blog.