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Tax on FD Interest 2021

Understanding Fixed Deposits

A fixed deposit can be described as a savings instrument for individuals who are interested in investing a lump sum amount. This is done for a pre-defined time period and with a set rate of interest.

At the time of maturity, the deposit will get back the interest earned on the principal amount during the FD period. It can be easily said from this description that FDs are risk-free and relatively safe investment options.

Because of these reasons, many individuals are interested in learning about tax on FD interest 2020 and 2021. This will help the depositor make more informed decisions regarding their investment.

If you also want to make great decisions that will help steadily increase your financial growth, then you are in the right place. Today, we will look at everything you need to know about tax on FD interest 2020 and 2021.

What is Tax on FD Interest 2020 and 2021?

We have already established that a term deposit is a common investment option that is free of risks and provides good returns. Because of this, banks offer fixed deposits to their customers.

Customers take advantage of this service by investing a certain amount for a predefined amount of time and with set interest. Once this time is up and the fixed deposit is matured, then the customers will receive the interest that they have earned on the principal amount.

As a general rule of thumb, the longer the period of maturity, the higher is the interest rate that is offered to the customer. It should also be noted that the interest accumulated on the fixed deposits is seen as a source of financial income. This means that this will be taxed. This will be done on the basis of the tax on FD interest 2020 and 2021 rules.

It should also be noted that there are a few exemptions to this rule. And this doesn’t mean that one should ignore fixed deposits when it comes to declaring taxes and income for a financial year. Instead, this means that there are some tax saving fixed deposits that one can invest in. In those cases, the tax on FD interest 2020 and 2021 will not be calculated according to the general rules.

Beyond this, you might find it interesting to note that term deposit income is looked at as ‘income from other sources’ when tax returns are being filed. Records for TDS payments that are deducted on fixed deposits are included in Form 26AS.

One must remember that term deposits are taxed at the rate of gross income. This means that if it is a part of the 10% tax bracket, then one has to pay a tax of 10% on the income that has been received from the term deposit interest.

What is TDS or Tax Deducted at Source?

The Income Tax Department of India does automated tax collection up to a certain limit. This means that if the income from an individual’s fixed deposit account is over INR 10,000, then tax is directly deducted at the source. The rest of the tax is paid by the individual as a self-assessment tax.

Individuals who have registered their PAN number with their bank can observe that the amount of TDs that is deducted at the bank is 10% of the income that has been derived from the interest. If the bank does not have the PAN number of the individual with them, then 20% TDS on the income is dedicated from term deposit interest.

If the income earned by the depositor is less than the minimum tax limit, then the TDS on the term deposit interest can be recovered. This is done at the time of tax filing by claiming a refund. Another option for the same is for individuals to submit a Form 15G. This form declares that the taxable income of the individual is lower than the minimum amount. This will ensure that the TDS will not be applicable on the interest earned through the term deposit.

Senior Citizens and Tax on FD Interest 2020 and 2021

Senior citizens are exempted by the Income Tax Department from TDS. Apart from that, individuals who fall under tax brackets of 20% or 30% will be required to file a separate self-assessment tax. The self-assessment tax is above the TDS amount that is being deducted.

Till now, we have mentioned a lot of information about tax on FD interest 2020 and 2021. It can get very confusing to digest all of this information. This is why we are not going to understand all this with the help of an example.

Manish belongs to the tax bracket of 20%. He has a term deposit of INR 10,00,000 with a bank that provides an interest rate of 8% per annum. The interest that Manish has earned in a given year is INR 80,000.

In this case, Manish is also required to pay tax on the interest earned. This should be equal to the gross income. This means that Manish has to pay 20% of INR 80,000, which is equal to INR 16,000. Further, a TDS of 10% will also be deducted by the bank on the income earned through interest, which is equal to INR 8,000. This means that the balance amount of tax that has to be paid by Manish as a self-assessment tax is INR 16,000 – INR 8,000 = INR 8,000.

Is It Possible to Avoid TDS on Term Deposits?

When most people are looking to learn about tax on FD interest 2020 and 2021, they also want to know about the different ways to avoid TDS. If you had the same motives when you were searching for tax on FD interest 2020 and 2021, then we’ll help you with that in this section.

  • Individuals can avoid TDS through a tax saving term deposit option. These options have a compulsory lock-in period of 5 years and the amount cannot be withdrawn before that
  • Individuals can submit Form 15G claiming that they do not earn a taxable income
  • Distributing or splitting the term deposit investments so that none of the interest exceeds INR 10,000

 

FAQs:

I’m a senior citizen. Do I have to pay income tax on fixed deposits?

Senior citizens are eligible for availing up to INR 50,000 as an income tax deduction from the interest income that they have received from the bank. This means that the bank will not deduct TDS from a senior citizen if the interest income with the bank is not more than INR 50,000 in a financial year.

Do I have to pay TDS if my income is below the taxable limit?

If an individual’s income is lower than the taxable limit, then he or she can avoid paying the TDS by filling Form 15G, which is applicable for individuals under the age of 60 years, or Form 15H, which is applicable for individuals over the age of 60 years.

I have multiple FDs with my bank. Will TDS be deducted from just one FD or all?

TDS is deducted from the interest income earned from all the FDs that are held in a bank. However, TDS on FD interest income is only applicable if the interest earned from the FDs with the bank exceeds INR 40,000 in a year. The TDS deduction is 10% in those cases.

Is TDS deducted from FD interest only at the time of maturity?

TDS on the interest earned on an FD is deducted at the time of crediting the interest to the linked savings account of the depositor. This does not necessarily have to be the time when the FD account matures.

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