Tax Deduction on Fixed Deposits: How It Affects Your Returns

Fixed deposit (FD) is a financial instrument where an individual can deposit a pre-defined sum of money for a fixed period of time and receive interest from the financial institution. An individual can start an FD in a bank or a Non-Banking Financial Institution (NBFC). However, there is a tax deduction on FD interest. 

This article provides insights into how much tax is deducted on FD. 

How is Interest Earned from Fixed Deposits Taxed? 

When individuals deposit their money in a fixed deposit they earn a fixed return each year. But the FDs are susceptible to changes in interest rates by the central banks.  

Any interest earned by an individual on a fixed deposit is taxed at their slab rates. For example, if an individual falls in the 30% tax bracket, the interest they earned on FD will be added to their total income and will be taxed at a 30% slab rate. 

Tax Deducted at Source 

Tax deducted at source(TDS) refers to the deduction that is made by the financial institution before you receive the payment, which they pay to the government. TDS is applicable when you receive interest from a bank or a NBFC. 

The payment receiver will receive the amount after deducting tax (net of tax). Later, they must report the gross amount (before tax deduction) as part of their income while filing their income tax return. As against this, the credit of TDS is also provided from the total tax liability or a TDS refund is offered in case of nil tax liability.

TDS Rules for FDs

Financial institutions charge a 10% TDS before crediting the interest payment to your bank account. The TDS is charged annually. Here are the rules regarding tax deduction on FDs: 

• Age – The exemption limit for TDS can depend on the age of the individual:

• For taxpayers under the age of 60, no TDS is charged if the interest received per annum is less than Rs. 40,000
• For senior citizens above the age of 60, no TDS is charged if the interest income is below Rs. 50,000. Remember, these exemptions are only available in the case of banks. 
• If interest earned from NBFC is more than Rs. 5,000, TDS is deducted. 
• PAN Card: TDS deduction also depends on availability of PAN cards.

• TDS charged by banks and NBFCs becomes 20%, in case you have not provided your Permanent Account Number (PAN) to the bank. 
• If you have provided the PAN, then the TDS stays at 10%. 
• Non-Resident Indians: For NRIs, the TDS is 30% for interest earned on FDs. 

When you file your tax return, the interest earned on FDs will be added to your total income to calculate your total tax liability. But, while paying taxes, the TDS already charged will be subtracted from the total tax liability. 

If the TDS paid is more than your total tax liability, or you don’t fall under any taxable slabs, then you can claim refunds to the tune of the TDS paid. 

Example of Tax on FD (with TDS)

To understand the interest on fixed deposits we will take up a scenario: 

A taxpayer below that age of 60, falling in the 30% tax bracket (New regime). 

Let’s assume the taxpayer earned a total taxable income of Rs.30,00,000 (including Rs.29,00,000 as salary or income from other sources and Rs.1,00,000 as interest income from FD). The taxation would be as follows: 

Particulars	Amount (Rs)	Total amount (Rs)
Total Interest earned from Fixed Deposit	1,00,000	–
TDS (10% ) on interest earned from FD	(10,000)	–
Total Interest Credited	–	90,000
Income from Salary/ Other Sources	29,00,000	–
Total Income	–	29,90,000
Total Taxable Income		30,00,000

From the total income of Rs.30,00,000 the total Income that the taxpayer earned is Rs. 29,90,000, since, Rs.10,000 were deducted as TDS. 

The total income tax liability for income in the range of Rs. 15,00,000 – Rs. 50,00,000 according to the new regime is equal to Rs.1,40,000 (fixed) + 30% above Rs.15,00,000. Now let’s calculate the total tax liability that investors need to pay. 

Particulars	Amount (Rs)	Total amount (Rs)
Income tax liability on total income (30,00,000)(Rs.1,40,000 (fixed) + 30% above Rs.15,00,000)	1,40,000 +4,20,000 (Salary) +30,000 (Interest)	5,90,000
TDS already deducted (for interest)	10,000	–
Total Income tax outflow	5,90,000 – 10,000	5,80,000

In case if the taxpayer earned less than Rs.40,000 as interest, then no tax would have been deducted at source, and the interest earned would be taxed at the slab rate. 

Now if a taxpayer is below the age of 60 and falls in the 30% tax slab the exemption for TDS will increase from Rs.40,000 to Rs.50,000 and the rest will remain the same. 

Exemption from Income tax 

Following are the rules for claiming exemption against tax deduction on fd: 

• A person under 60 years old can submit Form 15G to the bank to avoid any TDS deduction if their annual income is less than Rs. 3,00,000 (including interest). 
• Similarly, individuals above the age of 60 can submit form 15H if their annual income, including interest from FD, is below Rs.3,00,000 for the same purpose. 
• Citizens above the age of 80 whose total income, including interest from FD, is below Rs.3,00,000 can also prevent paying TDS by submitting form 15H. 

Conclusion 

It is very important to understand how much tax deduction on fd can you get so that you can claim the appropriate refunds while filing the tax returns. FD can be a good savings tool for you if you do not want to take any financial risk. Always remember that investment in tax-saving FD is tax deductible, but interest earned from FD is not. Are you willing to start your investment and learning journey? Download the Powerup’s Financial Planning app today!