Last Updated on May 24, 2022 by

As an investor, you can choose from many options to earn returns. Banks and financial institutions provide various schemes with different benefits, returns, and risks. One option preferred by most individuals is a fixed deposit.

Let us see what that is and the tax requirements you must follow.

What is a fixed deposit?

A fixed deposit is a way to invest your savings with banks or other financial institutions. Here, you put in a certain amount that gets locked up till maturity. This maturity period can be of any duration, depending on the provisions of the financial institution. The interest rate is higher than that of a regular savings account and varies depending on the tenure you select. 

However, once you open an FD, the interest you earn throughout its tenure remains the same. It is not affected by any interest rate fluctuation, hence the name ‘fixed’ deposit. 

On maturity, you receive the principal amount invested, and the interest earned thereof. This brings up the question of how to pay tax on this income. Let us see the provisions for the same. 

How is tax levied on FD interest?

There are tax-saving fixed deposits that you can claim as a deduction under Section 80C while filing your tax return. However, you are liable to pay tax on FD interest. Interest income comes under the heading ‘income from other sources‘ in your ITR. You must add this amount while calculating your total gross income as it is fully taxable. The tax rate applied depends on your tax slab.

Apart from this, the banks may charge TDS on your interest income. Here is when this is done.

TDS on FDs

Banks are liable to deduct tax at source on FD interest when it exceeds Rs 40,000. In the case of senior citizens, this limit is pushed to Rs 50,000. No TDS is deducted if the amount earned is less than this prescribed limit. Moreover, post offices do not deduct TDS if you start an FD there.

The TDS rate applicable is 10%. However, in case you have not given your complete PAN details to the bank, TDS will be deducted at 20%.

TDS return

There may be a situation where the total income you earn comes under the exemption limit. According to the latest tax regime, any income under Rs 2,50,000 is not taxable. This limit is Rs 3,00,000 for senior citizens. However, the interest you earn can exceed Rs 40,000. In such a case, if the bank deducts tax at the source, you are eligible to claim a refund. 

To ensure that the bank does not charge TDS on your interest income, you must inform them beforehand. For this, you are required to submit Forms 15G and 15H within the prescribed deadline. 

Timeline for payment of tax

If your total income becomes taxable when you add FD interest, you must pay tax on the interest by 31 March of the financial year.

Moreover, you may be required to pay advance tax in certain circumstances. Do so when your tax liability exceeds Rs. 10,000. The income tax department decides the due dates for paying advance tax.

Fixed deposits come with a fair share of financial as well as tax benefits. However, if you plan your FDs well, you may end up saving more on taxes. Let us see how to do this.

How can you reduce tax on your FDs?

There are several ways to reduce the tax on FD interest if you are mindful while putting your money in. You can increase your tax savings as follows:

1. Ensure timely submission of Forms 15G and 15H

If your total income does not exceed the exemption limit, you are not required to pay income tax. However, your bank may still deduct tax at the source of your interest till you inform them about this. To do so, you must fill out Forms 15G and 15H beforehand. To avoid any confusion, submit these with your bank at the beginning of the year itself.

2. Spread your FDs to different banks

TDS is charged on your interest income only if the amount exceeds Rs 40,000 (or Rs 50,000 for senior citizens). However, this limit is for different branches or separate banks, not your total interest income. So if you divide the total amount you wish to deposit over several branches or banks, chances are that they would not deduct TDS. It is only done when the amount crosses the prescribed limit at a single branch.

For instance, you wish to put Rs 10,00,000 in a fixed deposit at a 6.5% p.a. interest rate. This would fetch you Rs 65,000 as interest. On this, the bank would charge 10% TDS, amounting to Rs 6,500. However, you can divide this amount between two banks (or branches) and put Rs 5,00,000 in each. You will earn Rs 32,500 as interest at both places. Since this amount is less than Rs 40,000, no TDS is charged. You effectively save tax of Rs 6,500.

3. Invest at the right time

Choosing the right time to invest can help you save tax on FD interest. If you open an FD in the middle or towards the end of the year, the overall interest income may be divided over two separate years. Since TDS is charged every year, it may reduce the interest income considered in a particular year. 

4. Invest in the name of multiple individuals

If you set aside an amount that you want to invest in an FD, consider opening it under a family member’s name. This can be your parents, spouse, or even children. If their total income is not taxable, you can save on income tax. However, the Income Tax Act has a list of provisions for the clubbing of income. In such a situation, their income may be clubbed with yours. Make sure you comply with all the rules while filing your tax returns.

In conclusion

Fixed deposits are a great way to channelise your savings to earn a stable return. It is free from interest rate fluctuations and provides higher returns than a savings account. However, you must pay a tax on FD interest, depending on certain prescribed limits. Make sure that you are familiar with the latest rules. Invest in a way that you can minimize your tax liability.

Ayushi Mishra
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