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Is FD Interest Taxable

Fixed deposits are one of the most popular financial instruments that people invest their wealth in to grow their savings at low risk. It is especially popular among investors with low-risk appetites since it provides better interest rates than a savings account. It is flexible and offers attractive interest rates as compared to interest on saving deposits. FDs are perfect to add to the investment portfolio for senior citizens not just because of their low-risk appetite but also the greater FD rates banks offer them. 

One of the most asked questions when it comes to FDs is, “Is FD Interest Taxable?” Yes, it is. Let’s find out more.

Is FD Interest Taxable?

Fixed deposits allow you to exploit the complete potential of Section 80C of the Income Tax Act. This means that it allows you to deduct Rs 1.5 lakh from your taxable income. However, the interest income itself is fully taxable. The interest income you earn is classified as ‘income from other sources and hence is subject to income tax. 

So, you need to add it to your total income under the head ‘Income from Other Sources’ and get taxed at slab rates applicable to your total income. Thereon, the income is added to your total income, and tax is deducted as per your income tax slab.

However, banks also deduct tax at source at the time of crediting interest to your account after a certain threshold. For regular individuals, the threshold is Rs.40,000 whereas the threshold for senior citizens is Rs.50,000. Note that the TDS is deducted at the time of credit of interest and not at FD maturity. Hence, if your fixed deposit’s tenure is 4 years and the interest is Rs.45,000, TDS of Rs.4,500 will be deducted by the bank each year.

Understanding TDS and FDs

The amount of tax that is required to be deducted by a person or organization making payment to any other person, if the payment exceeds a certain threshold is called TDS. This TDS can then be further adjusted at the time of filing the returns. In cases where the tax liability exceeds the TDS, the taxpayer will pay the additional tax. If it is lower than the tax liability, a TDS refund can be claimed.

TDS is deducted on FD interest at the time of transferring the interest amount to your respective account every year. Note that TDS is deducted every year and not when interest is received after the period of FD matures. Another thing to keep in mind is that a TDS of 10% will be deducted if the interest in a year is more than the specified threshold. In addition, if PAN information is not submitted to the bank, the bank can deduct 20% TDS.

So, this is what the banks do. What do you do to make sure you don’t pay more or less tax than your liability?

What do You Do?

You just need to add your interest income to your Income Tax Return every year under ‘income from other sources. After that, check which slab you fall into and match it with the TDS deduction by the bank. The TDS will get adjusted by the Income Tax Department against your final tax liability. In case of no TDS is deducted by the bank, add the interest income in your total income and pay tax on it. Similarly, if TDS deducted is more than your tax liability and you are liable for a lower tax deduction but still, the bank has deducted TDS, you can claim the TDS refund by filing the income tax return.

However, individuals coming under higher income tax slab rates of 20% and 30% would need to pay self-assessment tax over the TDS. Also, senior citizens are exempted from tax on interest and earnings up to Rs 50,000 in a financial year from fixed deposits under section 80TTB of the Income Tax Act.



When do banks or post offices deduct TDS on fixed deposits?

TDS is deducted by the banks or post offices when the aggregate interest income on all fixed deposits exceeds Rs 40,000 per financial year. The threshold in the case of senior citizens is Rs..50,000.

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

Senior citizens can claim a tax deduction of up to Rs 50,000 on the interest income by FDs while filing their ITR.

How to get FD interest without TDS if my income isn’t over the taxable income margin?

If your total annual income is below Rs 2.5 lakh which is below the taxable income margin, regular individuals can submit the form 15G and senior citizens can submit the Form 15H. Your bank won’t deduct the TDS on your interest after submitting Form 15G/15H since income does not fall in the taxable slabs and you are not liable to pay any taxes.

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