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Whenever it comes to safe investment and guaranteed returns in India, the first name that comes to the mind of middle class families is Fixed Deposit i.e. FD. Be it working people, elderly people looking to manage their retirement capital or new investors who take very little risk – everyone finds it best to have an FD in a bank. FD is number one in terms of security, but one thing that many people forget or ignore is that The entire interest received from FD is not tax-free.
Often, due to lack of correct information, people make big mistakes while filing their Income Tax Return (ITR), due to which later they have to face both notice, heavy tax and penalty from the Income Tax Department. Let us understand in very simple words how your FD interest is taxed and how you can save it.
Where does FD interest get added to your earnings?
According to tax rules, interest received from bank or post office FD is not considered a part of your regular salary. rather it ‘Income from Other Sources’ Is counted under.
This simply means that whatever interest will be earned from your FD in a year will be added to your total annual income. After this, whichever tax slab you fall in (like 10%, 20% or 30%), you will have to pay tax on that interest accordingly.
Let us understand with a small example:
Suppose you work in a company and your annual salary is Rs 9 lakh. Apart from this, from the FD you have made in the bank, you have got interest of Rs 80 thousand in a year. In such a situation, the Income Tax Department will calculate your total taxable income not as Rs 9 lakh, but as a combination of both. Rs 9.80 lakh Will agree.
When and how much does the bank deduct TDS?
Many people think that unless they break their FD or the money does not come into their hands, there will be no tax on it. but it’s not like that. The bank keeps an eye on the interest credited to your account every year. If your total interest in a financial year crosses a certain limit, the bank itself TDS (Tax Deducted at Source) Takes a bite.
Understand what is the TDS limit for you from the table given below:
| category of customer | Fixed limit of annual interest (TDS Limit) | TDS rate on PAN update | TDS rate if PAN is not updated |
| Regular Citizens | ₹50,000 | 10% | 20% or more |
| Senior Citizens | ₹1,000,000 | 10% | 20% or more |
PAN card is most important: If you have linked your PAN card with your bank account, the bank will deduct TDS at the rate of 10% only. But if the bank does not have your PAN card updated, then the bank can directly deduct a huge TDS of 20% or even more.
The biggest misconception: “If TDS is deducted, no more tax worries!”
This is the biggest and most dangerous misconception spread among crores of taxpayers of the country. People think that since the bank has already deducted 10% TDS, their responsibility is over. But it is not true.
If your total annual income is so high that you fall in the higher tax slab of 20% or 30%, then the 10% TDS deducted by the bank is inadequate. You will have to pay the remaining tax amount (i.e. additional 10% or 20%) from your own pocket as ‘Self Assessment Tax’ while filing ITR.
How to save your money from TDS deduction?
If your total annual income (including salary, business and interest) is so low that no income tax is payable on you, then you can prevent the bank from deducting TDS. For this, you have to fill a form and submit it to the bank at the beginning of the financial year itself:
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For general citizens: Form 15G
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For Senior Citizens: Form 15H
After submitting this form, the bank will not deduct any TDS on your interest earnings.
Some smart ways to save tax on FD
If you want to protect your FD earnings from tax, you can adopt these two best methods:
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5 Year Tax Saver FD: You can get a ‘Tax Saver FD’ with a tenure of 5 years in any government or private bank. In this, you get the benefit of tax exemption of up to ₹ 1.5 lakh under Section 80C of the Income Tax Act. However, keep in mind that there is a lock-in period of 5 years, that is, you cannot withdraw this money before 5 years even if needed.
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Dividing investment among different banks: To manage the TDS limit of ₹ 50,000, some savvy investors, instead of keeping their entire amount in one bank, divide it into FDs of two or three different banks, so that their annual interest in any one bank does not exceed the limit.
An important advice while on the go: It is definitely safe to invest money in fixed deposits, but when you subtract the taxes and the country’s inflation rate from it, your real profit (Post-Tax Return) remains very less. Especially for those who fall in higher tax slabs, the actual returns of FDs are sometimes much lower than expected. Therefore, before investing, do not just look at the high interest rates, but also understand the impact of tax on your pocket.