The Impact Of Taxation On Fixed Deposit Returns

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Fixed Deposits (FDs) are a safe investment choice, but did you know the interest you earn isn’t entirely yours? The Indian government taxes FD interest income. Understanding how this works is crucial for your financial planning.

Learn about Tax Deducted at Source (TDS), how your income slab impacts your tax on FDs, and ways to potentially reduce your tax liability. Let’s dive into the world of taxes and your fixed deposit returns.

Understanding FD taxation

The interest earned on your fixed deposit is taxable under ‘income from other sources’ according to the Income Tax Act, 1961. This means you will need to include it in your total taxable income when filing your returns.

Tax deducted at source (TDS)

TDS thresholds: If the interest earned on your FD is less than Rs 40,000 per year, it’s exempt from Tax Deducted at Source (TDS). However, TDS on interest on fixed deposits will be applicable if the interest income exceeds Rs 40,000 (or Rs 50,000 for senior citizens).
TDS rates: PAN card users would have to pay 10% as tax on interest earned, and non-PAN users would need to pay 20%. For non-resident Indians (NRIs), the TDS rate is 30% on interest earned on FDs.

How does TDS work?

Tax on the FD interest is deducted as TDS when the annual interest is credited. In other words, the bank will automatically levy TDS on the interest earned on your FD.

Taxation based on your income

The tax on your FDs also depends on your total income for that year. Even if the bank has deducted TDS, you may still need to pay additional tax. For instance, if your total income is Rs 10 lakhs or more per annum, the FD interest will be taxable at your highest slab rate (which could be up to 30%).

No tax below the basic exemption limit

If your overall income is less than Rs 2.5 lakh in a year (the minimum taxable amount), there is no tax on your FD interest.

Submitting forms 15G/15H

To claim eligibility for tax exemption (if your income is below the taxable limit), you have to submit form 15H (for senior citizens) or 15G (for regular citizens) to your bank.

Tax-saving FDs

To avoid paying tax on your FD interest, you could opt for a tax-saving FD. These FDs come with a lock-in period of 5 years and allow you to claim a deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. However, note that the interest earned is still taxable.

Consider online FDs

For higher interest rates, consider opening an online FD like INDIE by IndusInd Bank. The application process is fully digital, and you can enjoy attractive interest rates of up to 7.75% per annum.

Conclusion

Being aware of the tax implications of fixed deposit interest is essential for effective financial planning. By understanding TDS, tax slabs, and tax-saving FD options, you can optimise your FD and make informed decisions to maximise your returns.