For most Indians, fixed deposits have been the most popular tools for savings. The risk-free and assured-return mode of parking your surplus money has been the preferred option across generations for a long time. However, many investors feel that while FDs ensure capital protection, they are not the perfect tax-saving instrument.
If you are keen on investing in FDs, there are multiple ways in which you can save on taxes. Read on to understand the tax liability on fixed deposits and also take away a few tips to make the most of FD tax exemption.
Fixed Deposits and Income Tax
The interest that you earn from a fixed deposit is considered an income that falls under the category of ‘income from other sources’, and is thus, taxable. It gets added to your annual income and would be taxed as per the income slab that you fall in. When your bank credits interest to your account, if the total interest on FDs is over ₹40,000, then TDS is applicable. In case you are a senior citizen, then this limit can go up to ₹50,000.
Tax Deducted at Source
For any payment made to an individual, a certain amount of tax is deducted and paid to the Central Government, before making the payment. This payment is known as ‘Tax Deducted at Source’ or TDS. Then while adding the gross amount to your income, you can report this when filing your ITR, and in case of zero tax liability, you would be able to claim a TDS refund.
Let us see this example, you earn an interest of ₹1,000 on your fixed deposit. The bank is supposed to deduct 10% of this as TDS and deposit this amount with the government. Then, when it is time for you to file your annual ITR, you need to report the total interest of ₹1,000 that you have earned. If you are eligible for the rebate you would be granted an FD tax exemption.
Paying Tax on the Fixed Deposit Interest
In case there is tax applicable on the interest that you have earned on your FD, you need to pay it before the financial year ends, which is the 31st of March. If the payable tax after including the interest income in your total income is ₹10,000 or more, then you need to pay advance tax.
Calculating Tax on the Interest Income
To calculate the tax on your income interest, you need to add it to the total income and file it in your Income Tax Return. This has to be reported as “Income Under Other Sources”. The IT department will make the required adjustments in the TDS, which has already been deducted. In case the bank/ financial institution where you have the FD, did not deduct the TDS, you need to add it to your total income and pay the required tax.
It is also advisable that you do not wait for the FD to mature and then report the interest that you have earned. An accumulated amount of interest may raise your income to a higher slab, thus you may end up paying more tax.
The following points will help you better understand Tax Deduction as well as FD tax exemption:
1. The bank will not deduct a TDS if:
The interest amount from all the FDs you possess is less than ₹40,000. In case you are above the age of 60 years, the limit will be raised to ₹50,000.
2. The bank will deduct 10% TDS if:
The interest income is more than ₹40,000 or ₹50,000 in case you are a senior citizen.
3. The bank will deduct 20% TDS if:
Your PAN information is not available with the bank.
4. If you have an annual income of ₹2.5 Lakhs or less, then there would be no TDS. Here, your bank
would not deduct TDS, even if the interest income is more than ₹40,000. Make sure that you submit 15G or 15H so that you can claim the interest income with the TDS.
Ensure TDS Deduction
When your annual income is not subject to tax, you can submit Form 15G and Form 15H to your bank/ financial institution before the due date. If you submit these forms in the beginning of the financial year, you can save yourself from the trouble of first the TDS deduction and then requesting the subsequent refund in your Income Tax Return. This is the only way to ensure that the bank does not deduct the TDS.
Tax-Saving Fixed Deposits
Another way to get FD tax exemption is through tax-saving FDs. Quite similar to a regular FD, in a tax saving FD, you can avail of tax benefits up to ₹1.5 Lakhs, as per Section 80C of the Income Tax Act, 1961. Unlike other investments such as ULIPs or mutual funds, FDs are not linked to the market and offer a fixed return. A lock-in period of 5 years makes tax-saving FD compound interest over time, thus making your money grow.
Things to keep in mind when investing in a Tax-Saving FD
If you wish to make a low-risk investment for a short term of 5 years, that offers you assured return and tax benefits, you may want to consider tax-saving fixed deposits, however, you must keep the following points in mind:
- These FDs come with a minimum lock-in period of 5 years
- A premature withdrawal or loan facility is not allowed
- The interest that you earn on the FD is taxable
- The rate of interest varies from 5.5% to 7.75%
- The minimum deposit can start from ₹1,000 and the maximum is ₹1.5 Lakhs
- Only HUFs and individuals over the age of 18 years can invest in this scheme
- The rate of interest offered by different banks/ financial institutions would be different
- The FD can be a ‘single’ as well as a ‘joint’ account. In the case of a joint FD account, only one of the two account holders would be allowed to get tax benefits
- Nomination option is available
- In the case of a Post OfficeFD, a transfer from one PO to another is allowed
- The taxable interest is subject to and would vary as per the income slab you fall into
- Senior citizens may get a higher rate of interest on their tax saving FD.
Other Tax Saving Options
In the market today, there are a number of tax saving options available. The table given below will help you draw a comparison and help you in making a well-informed decision.
| Product | Estimated Returns | Lock-In | Taxability |
| 5-Year Bank Fixed Deposit | 5% to 7% | 5 years | Yes |
| National Pension System | 8% to 10% | Till your Retirement | Partial |
| National Savings Certificate | 6% to 8% | 5 years | Yes |
| ELSS Funds | 12% to 15% | 3 years | Partial |
| Public Provident Fund | 7% to 8% | 15 years | No |
For an investor with a low-risk appetite, a tax saving FD offers the safety and security he/ she is looking for. There are other options such as mutual funds, NSC, Post Office schemes etc, but if you are someone who does not mind a low return and is seeking to make a short-term investment of 5 to 10 years, then investing in a fixed deposit might be the best option for you. You can make the most of your investment and get an FD tax exemption.
my mother expired in feb 23..she has an FD expiring in dec 23..bank is asking to submit TDS..how can i get refund of this TDS from IT ? do i need file IT return again for financial year 2023 -2024