Income Tax On Interest Earned From Fixed Deposits

Income Tax

Fixed deposits are popular saving instruments that allow you to earn interest for depositing an amount for a fixed period. You will get back the interest amount along with the principal amount upon maturity. However, the interest that you earn on FD is taxable. 

The following sections provide a complete guide on everything you need to know about tax applicable for interest on FD.

About Taxation on Interest Income

The interest you earn on fixed deposits fall under ‘Income from Other Sources’ in the income tax return and is fully taxable. To calculate income tax on interest on fixed deposit, you need to add your interest income to the total income, which is then taxed as per slab rates applicable to you.

Banks will deduct a TDS when they credit the accumulated interest to your account. However, this deduction will happen only if your interest is more than Rs. 40,000 for a particular financial year. For senior citizens, the basic exemption limit is Rs. 50,000. 

You should remember that a bank will deduct the TDS on interest on FD only when it credits the interest and not when an FD matures. 

Also Read – How to pay income tax online?

When Should you Pay Tax on Interest Income?

In case you need to add your interest income from FDs to your total income, you have to pay the tax either on or before March 31 of the relevant financial year. If your total tax payable after including interest income is Rs. 10,000 or more, you have to pay Advance Tax. 

Calculation of Tax on Interest Income

The interest income on FD has to be added to the total income while filing your ITR. The Income Tax Department will adjust the deducted TDS as opposed to the final tax liability. However, if the bank does not make TDS deductions on your interest income, you need to add the income to your total income and pay taxes accordingly.

You should not wait till the maturity of your fixed deposit to report the accumulated interest income. To check TDS deductions on any income, you can refer to Form 26AS.

Here are a couple of examples to help you have a clear idea about the calculation of income tax on interest on fixed deposits:

1. Mrs Sharma has a fixed deposit of Rs. 10 lakh with an interest rate of 7% per annum. She will receive a yearly interest of Rs. 70,000. The bank will make a TDS deduction of 10%. So the deduction on her interest income will stand at Rs. 7,000. Banks deduct TDS on FDs at a 10% rate.
2. Mr Singh has two FDs, each of Rs. 1 lakh, at an annual interest of 6% for a period of 4 years. So, for the first year, his interest income from each of the FDs would be Rs. 6,000, thereby making a total interest of Rs. 12,000. However, his bank will not deduct any TDS as his interest for the first year is below the exemption limit of Rs. 40,000. 

Also Read – How to use an online income tax calculator?

TDS Rates for Interest on FD

Before the Union Budget of 2019, the basic limit for TDS deduction on the interest income from FD stood at Rs. 10,000. Currently, it is Rs. 40,000. The bank will make a TDS deduction on the interest from all the fixed deposits you have with the bank. 

If your interest income from all those FDs goes beyond Rs. 40,000, then there will be a TDS deduction at a 10% rate. 

However, if you do not provide your PAN details to the bank, it will deduct 20% TDS from interest income on FDs.

When the overall income for a financial year is lower than the minimum taxable amount, then your bank will not deduct TDS from the FD interest income. You might have an interest income of more than Rs. 40,000. But if your taxable income is less than Rs. 2.5 lakh (minimum exempted income), the bank would not make any TDS deduction.

However, you will have to submit Form 15G or Form 15H to receive TDS-free interest on FD. 

Final Word

If you are wondering about the taxability on interest income from FDs, then make sure to refer to the detailed guide on tax calculation and TDS rates on FD interest income. In case the bank deducts a higher TDS than you are liable to pay, you may claim the excess amount while filing income tax return. 

Frequently Asked Questions

Do I have to pay a self-assessment tax for interest on FD?

If you belong to higher tax slabs such as 20% or 30% slab, then you will have to pay a self-assessment tax over the TDS deduction on your FD interest income. Those in lower tax slabs do not have to pay this additional tax on FD interest.

What is the TDS deduction rate on interest income for senior citizens?

The TDS deduction rate for interest income from fixed deposits for senior citizens is the same as the rest. However, the basic exemption limit is Rs. 50,000 for a year. In other words, no TDS deduction will take place if interest income from FDs for a year is not more than Rs. 50,000. 

How to save taxes on fixed deposits?

Here’s how you can reduce taxes on fixed deposits:

• You can make fixed deposits at different branches of different banks.
• You can invest in fixed deposits under the name of your children, spouse or parents.
• If your total taxable income is below Rs. 2.5 lakh, you may submit Form 15G or 15H to the bank to avoid TDS deduction.

What is Section 80TTB?

As per amendments through Finance Bill 2018, senior citizens with interest income from FDs, RDs, and savings account can claim deductions of up to Rs. 50,000 under Section 80TTB of the Income Tax Act.

Is TDS deduction applicable for NRI fixed deposits?

The interest earned on NRE (Non-Resident External) FD does not attract tax deduction in India. However, you need to pay TDS on interest earned from NRO (Non-Resident Ordinary) FD. The TDS deduction for interest from NRO FD is 30%, along with surcharge and cess.

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.