Be aware of the tax implications and tax benefits that you can avail of when you invest in savings instruments like Fixed Deposits.
Fixed Deposits are popular savings instruments in India. They are a safe investment option and most fixed deposits can be closed before maturity in case of emergency cash needs, though you would lose a little on the interest amount you receive.
However, FDs are also assets that are taxable.
Taxation Rules and Fixed Deposits
Fixed Deposits are term deposits that you create and leave untouched for a predetermined tenure to get the full benefits. Banks pay an interest on the deposits that can be paid out monthly, quarterly, or annually. The interest earned on fixed deposits is considered as income for the purpose of filing IT returns.
TDS Done by Banks
If you are earning more than Rs. 10,000 as interest on FDs in a bank, the bank will deduct 10% as Tax Deduction at Source. If the bank does not have your PAN Card details, it will deduct 20% as TDS. Keep in mind that the bank takes into account interest earned from all the FDs held by you across different branches of a bank. It is not calculated on a branch basis, but on bank basis.
Tax is calculated on the basis of interest accrued and not on the basis of when the interest is actually paid. So, even if you’ve not received the interest on your account for that financial year, and the accrued interest exceeds Rs. 10,000, the bank will do a TDS on the interest accrued so far.
Fixed Deposits and your Tax Slab
TDS helps automate a part of the tax collection process and it can also make tax filing easier for you. All the TDS payments are recorded automatically in the Form 26AS of the IT Department. When filing your IT returns, you can check this record and see if you have to pay any excess amount that you still owe according to your tax slab.
The tax on your interest earnings is on the same level as your tax slab.
Self-Assessment Tax
Be sure to give your PAN card details to all banks and branches where you have accounts. This way, you can ensure that only the standard 10% TDS is done, not 20%. After that, you have to assess the remaining amount that you need to pay, according to your income status.
If you belong to the 10% tax slab, the TDS is enough, you don’t have to pay any further amount. However, if you belong to a higher tax slab, like 20% or 30%, then you have to pay more. Calculate the total tax you have to pay on your interest earnings, deduct the TDS and pay the remaining amount as self assessment tax.
Can you Save on Taxes with Fixed Deposits?
There are ways to get tax benefits through FDs. Consider tax saving deposit options. Also, file appropriate documents with the bank if you are eligible for tax exemption, to avoid TDS.
Tax Exemptions
If you are a senior citizen, that is you are over the age of 60, you are eligible for tax exemption on your FD interest earnings. To avoid TDS and to make sure that your interest earnings are not taxed at the end of the financial year, you have to submit Form 15H to your bank.
If you are not a senior citizen but your total income including interest earnings is within the minimum tax slab, you should fill in and submit Form 15G to the bank.
Tax Saving Fixed Deposits
If you do not qualify for Form 15H or Form 15G, but still want to save on taxes you can consider deposit schemes like tax-saver Fixed Deposits. Most banks offer these long term FDs to customers as a way to get tax exemption.
Under Section 80C of the Income Tax Act, you can claim certain tax exemptions. The tax saving FD is one of the options you can use to save on taxes.
Generally, the tax saving FD is a deposit that has a tenure of 5 years, and the fixed deposit rates on this type of FD is higher. However, you cannot close the FD before time, and you cannot get a loan on this FD. However, the tax advantage is that you can claim tax exemption on the principal that you have invested in this scheme, up to a maximum limit of Rs. 1.5 lakhs. Note that the interest earned on this FD is still taxable.
To sum it all up, you need to keep these taxation rules in mind when you invest in fixed deposits:
- Interest earned on FDs is considered as income and is taxable under the IT Act
- Bank deducts TDS on the interest accrued, 10% if they have your PAN Card details, 20% if they don’t
- Interest earned is taxed according to your tax slab.
- You can avoid TDS and taxes by filing the appropriate forms with the bank if you are eligible for tax exemption. If you are a senior citizen, you have to submit Form 15H. If you are under 60 but your total income for the year including interest earnings is below the minimum tax slab, submit Form 15G
- Invest in tax saving FDs to avail of tax exemption on the amount invested under Section 80C. However, the interest amounts earned on these fixed deposits are still taxable
Fixed deposits are excellent options as savings instruments and should definitely be a part of your investment portfolio. These are low yield but risk free investments. Don’t forget to include your earnings from FDs while filing IT returns, and keep in mind the above important taxation rules regarding FDs.