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When & How to Pay Income Tax on Fixed Deposit Interest Income?

  • Highlights

  • FD interest income is added to your total income to calculate tax liability

  • Banks deduct TDS at 10% of FD interest

  • If your PAN card is linked to your bank account 10% TDS is deducted

Fixed deposits (FD) have long been a popular investment option for many investors, particularly senior citizens. This is because FDs are fixed investment tools, and are not affected by market forces. They provide a steady rate of returns, and the risk of losing your capital is reduced to a great extent as well.
However, the steady returns from FDs means that they are taxable. The income from your FDs is added to the rest of your income under the heading ‘Income from Other Sources’ and is taxed at the same rate. Banks deduct the ‘tax deducted from source’ (TDS) for the interests on FDs when it is accrued.

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How Income Tax on FD Interest Is Calculated

As mentioned, you have to add your interest income to your total income and calculate your tax liability accordingly. You can match that with your yearly TDS deduction that your bank makes. Even if it hasn’t been deducted, you need to pay tax on your total income that includes your interest income.
Remember, it is recommended to pay tax on your interest income yearly, as if you wait till maturity of your FD, you may have to pay more overall. Your Form 26AS will contain all the details of the TDS deducted on any of your sources of income.

To understand the calculation better consider the following example:
Let’s say that you fall under the 20% tax bracket, and you have 2 FDs of Rs. 2 lakh each for 3 years at 8% p.a. In the first year your return interest comes to Rs. 1,600 each for the 2 FDs, and your total interest will be Rs. 32,000. Now, your bank will deduct TDS at 10% of interest, which for these two FDs combined will come up to Rs. 3,200. Now, based on your income tax bracket you will have to pay 20% of interest which will come to be Rs. 6,400. Since TDS has already been deducted, the total balance amount you will have to pay is Rs. 3,200. You can use Fd Calculator Online to calculate returns.

When Is Income Tax Paid on Interest Income

Income tax should be paid before 31st March, i.e., before the end of the financial year. You may also be liable to pay quarterly advance tax, if you have a large income from interest. Remember to link your PAN card to your bank account to avoid the 20% TDS deducted otherwise. If your PAN card is linked, only 10% TDS is deducted.
Additionally, you are also eligible for tax deductions if your fd rates comes to less than Rs. 10,000. That is, if your interest income is less than Rs. 10,000 banks won’t deduct TDS. Moreover, when your total income is less than Rs. 2,50,000, you can provide the 15G and 15H Forms to avoid TDS as well Read this to save tax on fd interest.
However, under Section 80TTB of the Income Tax Act in the Budget 2018, the interest income to avoid deduction has been raised to Rs. 50,000, for senior citizens. This means that TDS will not be deducted from senior citizens who earn less than Rs. 50,000 as bank FD interest. Thus, FDs are a good source of steady income, even though they are taxable.

Additional Read: How to apply for PAN Card Online

Also Read: When Is Income Tax Paid on Interest Income

DISCLAIMER: The mentioned fixed deposit interest rates are indicative only, and may be subject to change periodically. Please check the interest rates on our website.

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