How is the interest earned on a Fixed Deposit taxed?
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How is the interest earned on a Fixed Deposit taxed?

  • Highlights

  • Interest income from fixed deposits are taxable

  • A 10% TDS is deducted if the interest earned exceeds Rs.10,000

  • No TDS is deducted if net income is below the tax threshold

  • Form 15G/H must be submitted to avoid TDS deduction

Easy to understand, assured returns and latent to market volatility have made fixed deposits (FD) one of the most preferred investment avenues for most Indians. This asset class is extremely popular among senior citizens, who park a major chunk of their retirement corpus, into an FD.

However, even though FDs are fixed-return instruments, the interest income is not entirely tax-free. The interest earned on an FD is added to your net income and taxed accordingly. Read on to know how income from FDs is taxed.

Taxation of FDs

Under the provision of the Income Tax Act, 1961, the interest earned on FDs is added under “Income from other sources” in your IT return and taxed at the rates applicable. If the interest on your FD exceeds Rs.10,000 in a financial year, banks deduct a TDS of 10% in case you have provided your PAN details. Note that if you haven’t provided your PAN details, TDS is deducted at the rate of 20%.

So, let’s say your interest income from your FD is Rs.20,000 in a fiscal year, if you’ve provided your PAN details, your bank will deduct a TDS of Rs.2,000. In case you’ve not provided PAN details, TDS of Rs.4,000 is deducted.

Today, even if you have FDs in different branches of the same bank, banks aggregate all interest income to calculate TDS. Earlier, it was applicable for a single branch.

When you don’t need to pay any TDS?

However, note that if your net income is less than the minimum taxable amount, even if you earn an interest of more than Rs.10,000, no TDS is deducted. In such a scenario, you need to tell your bank about your net income by submitting Form 15G, if you are below 60 years. Senior citizens need to submit Form 15H to avoid TDS deduction on interest income earned from FDs.

Higher exemption for senior citizens

Interest earned from FDs are a major source of income for senior citizens and retirees. In the Union Budget 2018, Finance Minister Arun Jaitley announced tax exemption in interest income up to Rs.50,000 for senior citizens. It means senior citizens will not have to pay any taxes on FD interest earned up to Rs.50,000.

What if TDS is deducted even if your net income isn’t taxable?

If you have failed to submit Form 15H/G, and the interest income from the FD is above Rs.10,000, the bank will deduct a TDS. Note that you can claim a refund of this amount while filing your tax returns. Hence, it’s always better to submit the relevant forms if your net income doesn’t fall under the tax ambit.

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