How to Pay Income Tax on Fixed Deposit (FD)?

Written by : Knowledge Centre Team

2024-08-02

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The fixed deposit has been one of the most popular and oldest investment plans in the modern financial world. You deposit a sum of money with your trusted bank for a limited time and receive a higher sum back at expiry. Fixed deposits can be credited with making the compounding interest popular among the common folk.

However, the interest you receive from the bank on such a term deposit is usually not free of tax.

Income Tax on Fixed Deposit Interest

The interest you receive from a fixed deposit, either from a bank, post office, or corporate, is completely taxable. You can choose to pay the tax in any of the following two manners:

1. Accrual Basis

Whether the interest is received in your account or cash or not, you declare the interest credit and pay the tax.

2. Cash Basis

You pay the tax as and when you withdraw the interest or FD matures.

The only catch is that you need to use only one of these methods for all FD tax calculations. And once you choose one method of taxation for one FD you cannot change it.

You need to add the interest income from FDs to your other taxable income before calculating your tax liability as per the slab rates.

TDS on Fixed Deposit

Interest income that you earn from your termed fixed deposits is fully taxable. Banks will deduct tax at source (TDS) on the interest income at 10% if it exceeds:

a) 40,000 if you are below 60 years of age

b) 50,000 if you are a senior citizen, i.e. above 60 years of age

The deducted TDS will show up on your Form 26AS, which reduces your final tax liability.

You will need to be careful while filing your FD returns on the receipt (cash) basis, as TDS applies on the accrued interest. So, make sure all your TDS for the years of accrual have been carried forward to the year in which you are receiving the interest.

How to Avoid TDS on FD Interest?

The first question is, ‘can you avoid TDS on fixed deposit interest?’ Yes, you can, but only in the following cases:

- Your total interest for the year from FDs does not exceed the TDS limits
- FD interest is your only income

While you do not need to do anything in the first case, in the second you need to submit form 15G & 15H.

Form 15G/H is a declaration form to declare that FD interest is your only income in the financial year. You need to file 15G if you are below 60 and 15H if above 60 years of age.

Income Tax on Fixed Deposit

Understand the difference between Form 15G and 15H.

Income Tax on Interest from Tax-Saving FDs

The five-year tax-saving term deposits from banks and post office give you a deduction under section 80C. You should note that this deduction is for the invested amount and not the interest.

Thus, you can claim a deduction of up to Rs 1.5 lakhs on the invested sum. But any interest you receive from the deposit will become taxable in the year it accrues.

Other Ways to Save Tax

One of the easiest ways to reduce your tax liability for the financial year is to invest in tax-saving instruments. However, you should seek to reduce not only your present tax liabilities but also the future ones, when the investment matures.

All tax-saving investments have one of the following three tax structures:

EEE – Investment, accrued interest and maturity amount are all exempt from tax.
EET – Only invested amount and accrued interest are exempt.
ETT – Only invested amount is exempt.

The following investment options fall in the first category:

Public Provident Fund (PPF)

Sukanya Sammriddhi Yojana (SSY)

Life insurance plans such as guaranteed savings plans and moneyback plans

Unit-Linked Insurance Plans (ULIPs)

New Pension Scheme Tier-I account

Investing in these options not only reduces your annual tax outflow but also saves you from future taxable income.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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