How to Pay Income Tax on Fixed Deposit Interest Income
Fixed Deposits (FDs) are popular for their guaranteed returns and capital protection. They also help you take full advantage of Section 80C, allowing you to deduct Rs.1.5 lakh from your taxable income. However, the interest income from FDs is fully taxable. Often, investors overlook the need to pay taxes on this interest. This article will explain when and how to pay income tax on FD interest income.
Understanding FD Interest Taxation
- Interest Income: The interest earned on Fixed Deposits is considered ‘Income from Other Sources’ and is added to your total income. It is taxed according to the income tax slab applicable to you.
- Tax Deducted at Source (TDS): Banks deduct TDS on FD interest if the interest income exceeds Rs.40,000 in a financial year (Rs.50,000 for senior citizens). The TDS rate is 10% if your PAN is provided to the bank; otherwise, it is 20%.
Taxation of FD Interest Income
The interest income earned from FDs is added to your total income and taxed according to your applicable tax slab. This interest must be reported under the ‘Income from Other Sources’ section in your Income Tax Return (ITR).
Banks deduct TDS when crediting interest to your account if the interest exceeds Rs.40,000 for individuals and Rs.50,000 for senior citizens. It’s important to remember that TDS is deducted annually, not just at the maturity of the FD.
Example of CBS (Core Banking Solutions)
Banks using CBS aggregate interest credited across all branches to check if the total exceeds the TDS threshold.
Branch | FD Amount | Interest Rate | Annual Interest | Total Interest |
Dwaraka | Rs.2,50,000 | 9% | Rs.22,500 | |
Janakpuri | Rs.2,50,000 | 9% | Rs.22,500 | |
Rohini | Rs.2,50,000 | 9% | Rs.22,500 | Rs.67,500 |
In this case, the bank must deduct TDS because the total interest (Rs.67,500) exceeds the Rs.40,000 limit.
Understanding TDS
TDS is deducted by the payer (in this case, the bank) and paid to the government. You receive the net amount after TDS, but you must report the gross interest income in your ITR. You can then claim the TDS as a credit against your tax liability or request a refund if applicable.
Example: If you earn Rs.50,000 in FD interest, the bank will deduct 10% TDS (Rs.5,000) and credit Rs.45,000 to your account. When filing your ITR, you report Rs.50,000 as income and claim Rs.5,000 as TDS credit.
TDS on Recurring Deposits (RDs)
Similar to FDs, interest on RDs is fully taxable. Banks deduct TDS at 10% if interest exceeds Rs.40,000 (Rs.50,000 for senior citizens).
Calculating Tax on Interest Income
Add the annual interest income to your total income in your ITR. This should be done every year, even if the interest is not paid out. Determine your tax slab and calculate the tax accordingly. The TDS already deducted will be adjusted against your total tax liability.
Example:
Year | FD Interest | TDS Deducted | Net Interest Received | Total Income |
1 | Rs.12,000 | Rs.1,200 | Rs.10,800 | |
2 | Rs.12,000 | Rs.1,200 | Rs.10,800 | |
3 | Rs.12,000 | Rs.1,200 | Rs.10,800 | Rs.36,000 |
When to Pay Tax on Interest Income
If your total tax liability after including interest income exceeds Rs.10,000, you must pay Advance Tax quarterly. This prevents underpayment of taxes at the end of the year.
TDS Exemptions and Forms 15G/15H
- No TDS Deduction: If your total FD interest income is below Rs.40,000 (or Rs.50,000 for senior citizens), the bank will not deduct TDS.
- 20% TDS Deduction: If you don’t provide your PAN, the bank deducts 20% TDS.
- Total Income Below Exemption Limit: Submit Form 15G (for individuals below 60) or Form 15H (for senior citizens) to avoid TDS if your total income is below the exemption limit.
Threshold Limits for TDS Deduction
Category | Senior Citizen (Rs.) | Others (Rs.) |
Co-operative banks | 50,000 | 40,000 |
Primary Agricultural Credit Society | 50,000 | 40,000 |
Co-op. Land Mortgage/Development Bank | 50,000 | 40,000 |
Steps to Pay Tax on FD Interest
- Calculate Total Interest Earned: Add up the interest earned from all your FDs across different banks. This total interest is what you need to report in your income tax return (ITR).
- Check Form 26AS: Form 26AS is a consolidated tax statement that shows the TDS deducted by banks. Verify the TDS details against your FD interest income.
- Determine Your Taxable Income: Add the total FD interest to your other income sources (salary, business income, etc.) to find your gross taxable income.
- Compute Tax Liability: Calculate your total tax liability based on your taxable income. Deduct the TDS already deducted by the banks from this total tax liability to determine the remaining tax payable.
- Pay Advance Tax or Self-Assessment Tax: If your total tax liability after TDS exceeds Rs.10,000, you are required to pay advance tax in quarterly installments. If the TDS deducted is less than your total tax liability, pay the remaining tax as self-assessment tax before filing your ITR.
- File Your Income Tax Return: Report the total FD interest under ‘Income from Other Sources’ in your ITR. Ensure to include the TDS details to get the credit for the tax already deducted.
Avoiding TDS on FD Interest
If your total income is below the taxable limit, you can avoid TDS on FD interest by submitting Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to the bank at the beginning of the financial year. These forms declare that your total income is below the taxable limit, and hence, no TDS should be deducted.
Example Calculation
Suppose you have an FD interest income of Rs.50,000 in a financial year, and you fall under the 20% tax slab. Here’s how to compute and pay the tax:
- Interest Earned: Rs.50,000
- TDS Deducted by Bank (10%): Rs.5,000
- Total Tax Liability (20%): Rs.10,000
- Tax Payable After TDS: Rs.10,000 – Rs.5,000 = Rs.5,000
You need to pay the remaining Rs.5,000 as self-assessment tax or advance tax.
Special Considerations for Senior Citizens
Senior citizens can avail of a deduction of up to Rs.50,000 on interest income from FDs, RDs, and savings accounts under Section 80TTB. If their total FD interest income is below Rs.50,000, no TDS will be deducted.
Filing Tax Returns for Homemakers
Homemakers must file an ITR if their total income exceeds the basic exemption limit. If their income is below this limit, they can submit Form 15G to avoid TDS and claim a refund for any tax deducted.
Age Group | Form to Submit | Taxable Income Limit |
Below 60 years | 15G | Rs.2.5 lakh |
60-80 years | 15H | Rs.3 lakh |
Above 80 years | 15H | Rs.5 lakh |
Understanding how to report and pay taxes on FD interest income ensures compliance and prevents penalties. Keep track of your interest income, claim deductions, and submit the necessary forms to manage your tax liability effectively.
