Fixed deposits (FDs) are one of the most popular investment options in India, offering assured returns and capital safety. While they are an excellent choice for risk-averse investors, it is essential to understand the tax implications of the interest earned on FDs. Proper knowledge of taxation helps in planning your finances better and optimising returns.
Understanding Fixed Deposits
A fixed deposit is a financial instrument offered by banks and non-banking financial companies (NBFCs), where an individual deposits a sum of money for a fixed tenure at a predetermined interest rate. The interest earned on FDs is taxable, and this taxation depends on the investor’s income tax slab rate.
Using an FD Rate Calculator
An FD rate calculator is a useful tool that helps investors calculate the interest earned on their fixed deposits based on the principal amount, interest rate, and tenure. It also provides an estimate of the maturity amount. Here’s how you can use an FD rate calculator to understand your tax liability:
- Enter Principal Amount: Input the initial deposit amount in the calculator.
- Select Interest Rate: Enter the interest rate offered by the bank or NBFC.
- Choose Tenure: Select the tenure of the fixed deposit.
- Compounding Frequency: Choose the frequency at which the interest is compounded (monthly, quarterly, annually).
- Calculate Interest: The calculator will provide the total interest earned and the maturity amount.
By using an FD rate calculator, investors can estimate their interest income and determine their tax liability based on their income tax slab.
Taxation of Fixed Deposit Interest
The interest earned on fixed deposits is considered “Income from Other Sources” and is fully taxable. Here is a detailed breakdown of the tax implications:
1. Income Tax Slabs
The tax you pay on FD interest depends on your annual income:
- Individuals earning up to ₹2,50,000 annually (for non-senior citizens) do not have to pay tax on FD interest.
- Senior citizens (aged 60 and above) enjoy a higher basic exemption limit of ₹3,00,000, and super senior citizens (aged 80 and above) are exempt up to ₹5,00,000.
- For incomes exceeding the exemption limits, the interest is taxed as per the applicable tax slab rate (10%, 20%, or 30%).
2. TDS (Tax Deducted at Source)
Banks and NBFCs deduct TDS if the interest earned in a financial year exceeds the prescribed limit:
- For general citizens: TDS is deducted at 10% if the total interest exceeds ₹40,000 in a year.
- For senior citizens: The threshold is higher at ₹50,000 annually.
- If the depositor has not provided their Permanent Account Number (PAN), TDS is deducted at a higher rate of 20%.
3. Form 15G and Form 15H
If your total income is below the taxable limit, you can submit Form 15G (for individuals below 60) or Form 15H (for senior citizens) to the bank to avoid TDS deduction.
Deductions and Exemptions
1. Section 80TTA
Interest earned on savings accounts is exempt up to ₹10,000 under Section 80TTA. However, this exemption does not apply to fixed deposits.
2. Section 80TTB
Senior citizens can claim a deduction of up to ₹50,000 annually on the total interest earned from savings accounts, fixed deposits, and recurring deposits under Section 80TTB.
Calculating Taxable Income from FD Interest
To calculate your taxable income, add the total interest earned from fixed deposits during a financial year to your other sources of income. You can use an FD rate calculator to estimate your total interest earnings based on the deposit amount, tenure, and interest rate.
Impact of Cumulative vs Non-Cumulative FDs
- Cumulative FDs: Interest is compounded periodically but paid at the end of the tenure. Even though you don’t receive interest annually, it is still taxable every year on an accrual basis.
- Non-Cumulative FDs: Interest is paid periodically (monthly, quarterly, or annually). This interest is taxed in the year it is received.
Tax-Saving Fixed Deposits
A tax-saving fixed deposit offers dual benefits of earning interest and claiming tax deductions under Section 80C of the Income Tax Act. Features include:
- A lock-in period of five years.
- Maximum deduction of ₹1,50,000 in a financial year.
- However, the interest earned during the tenure is fully taxable.
Advance Tax Liability
If your total tax liability exceeds ₹10,000 in a financial year, you are required to pay advance tax. This includes the tax on your FD interest. Failing to pay advance tax can attract interest under Sections 234B and 234C.
Tips to Manage FD Taxation
- Submit Form 15G/15H: Ensure you submit the relevant form if your income is below the taxable limit to avoid unnecessary TDS deductions.
- Distribute Investments: Spread your fixed deposits across multiple financial years to avoid exceeding the TDS threshold in a single year.
- Joint Accounts: If you hold FDs jointly, ensure the interest is reported by the account holder whose PAN is linked to the FD.
- Use an FD Rate Calculator: Calculate your expected interest income beforehand to assess its tax implications and plan accordingly.
Conclusion
Fixed deposits remain a reliable investment option for secure and consistent returns. However, the interest earned is fully taxable, and understanding the tax implications is essential for effective financial planning. By utilising tools like FD rate calculators and staying updated on tax rules, you can optimise your FD investments while ensuring compliance with tax regulations. Proper management and tax planning can help you maximise the benefits of your fixed deposits while reducing tax liabilities.
