FDs may be everyone’s favourite safe investment avenue, but many forget to consider their tax implications. However, neglecting to pay income tax on FD interest earnings can lead to problems. Aside from a few exceptions, all FD investments, including tax-saving FDs, attract income tax on the interest payout.
The recent rate hikes have turned FD rates positive after many years, allowing you to earn returns that beat inflation. Current interest rates are ranging between 3% and 8.50% or more. In such a scenario, FDs are a worthy addition to the long-term debt allocation of your portfolio.
Before considering an investment in FDs, it is important to understand your tax implications as well as the TDS on FD interest. Income tax on FD interest is calculated differently from other investments. Keep reading to know more.
How to Discern Payable Income Tax on FD Interest
Income by way of FD interest is fully taxable under the Income Tax Act of 1961. It needs to be included in your total income under the heading ‘Income from Other Sources’ when filing your Income Tax Return or ITR. This way, income tax on FD interest is calculated at the applicable slab rate, according to your annual income.
Financial institutions are required to deduct tax at the source before crediting the interest to your account. This is called tax deducted at source or TDS, which is then paid to the Central Government. The TDS on FD interest is set at 10% if the bank has your Permanent Account Number (PAN) details. If you fail to provide your PAN information, TDS is levied at 20%. NRIs have to pay a TDS of 30% + applicable surcharge and cess.
You will receive the interest amount in your account post-TDS, which then has to be added back to your interest income. In your ITR, the income tax on FD interest is calculated on this cumulative amount. For example, say you were supposed to receive ₹7,000 as interest, but 10% TDS was deducted, which amounts to ₹700. In this case, you would receive only ₹6,300. However, you have to report an interest income of ₹7,000.
Now, you can claim the TDS amount of ₹700 deducted by the financial institution as a TDS return or get a deduction on the amount you pay as tax. If you are liable to pay income tax for the ongoing financial year, the TDS amount can be used to offset that liability.
Else, you can claim a refund of the TDS amount by submitting Form 15H or 15G to your financial institution. This needs to be done well in advance, at the beginning of the financial year.
TDS on FD Interest Income: Calculations and Exemptions
Banks evaluate your yearly interest income from all the FDs you hold with them. If your interest income exceeds ₹40,000, a 10% TDS deduction is applicable. This threshold is ₹50,000 in the case of senior citizens (60 years and above). This is the minimum required cut-off, and banks cannot deduct TDS unless this is met.
For non-bank FDs such as those provided by NBFCs, this cut-off is ₹5,000. Similar to banks, the TDS on FD interest is set at 10% for income exceeding this. However, there are scenarios in which tax is not deducted at source regardless of the income you earn from an FD. These include the following:
- Annual income is less than the minimum taxable amount
According to current income tax slabs, those earning up to ₹2.5 Lakhs p.a. are exempt from paying income tax. Hence, even if your FD interest income is ₹40,000 or more, provided your overall income is below ₹2.5 Lakhs, no TDS on FD interest will be deducted. - Tax liability for the financial year is zero
Financial institutions should not deduct TDS if your tax liability for the year is zero. This is because you cannot offset it against your tax liability, leading to a double tax effect. In such instances, make sure to submit Form 15G or 15H to request that no TDS be deducted from your FD interest.
However, if TDS on FD interest is still deducted, you can separately claim a refund while filing your ITR.
When to Pay Income Tax on FD Interest?
The financial year in India falls from 1st April to 31st March of the following year. You must pay the income tax on FD interest by 31st March. All outstanding income tax payments should be made by then if your total tax liability falls below ₹10,000.
However, further planning is required if your tax liability for the year amounts to ₹10,000 or more after adjusting TDS. In this case, you are required to estimate your yearly income to pay tax in instalments before the end of the year. This is called advance tax.
The government prescribes specific dates for the payment of advance tax. Typically, 15% of tax liability is to be paid on or before June 15th and 45% is to be paid by September 15th, while at least 75% must be paid by December 15th. Finally, the entire advance tax liability is to be covered by March 15th.
If you end up paying advance tax higher than your actual tax liability, the excess amount will be refunded. If the excess is more than 10% of your tax liability, then the Income Tax Department will pay you an interest of 6% p.a.
In conclusion, it is imperative that you stay updated with the tax implications of your FD investments. Even a tax-saving FD, while offering a tax deduction of up to ₹1.5 Lakhs on taxable income, incurs income tax on the FD interest income.
Pay attention to tax payment deadlines and make the necessary payments to avoid any complications down the line. If the process is too cumbersome, you can enlist the help of a financial advisor or CA.
Santosh Kumar is a Professional SEO and Blogger, With the help of this blog he is trying to share top 10 lists, facts, entertainment news from India and all around the world.