Fixed Deposits : Know your taxes


(Last Updated On: May 2, 2018)

Fixed deposits are the most popular way of investing your money in India. It is considered as the most secure avenue for investing your hard earned funds.

It hurts a lot when you have to pay tax on the amount of interest you earned from the fixed deposits. Moreover , you have to every year include this income while filing your Income Tax Return. In other words, investing money in fixed deposits without having complete information would result in Income Tax notice or increased taxes.

Didn’t know about these intricacies? Right.

We are going to tell you the truth behind your Fixed Deposit returns , it’s impact on your taxes and how you can save taxes.

Returns on Fixed deposits :-

There is a huge misconception amongst the people that we get a return of around 6-8% on Fixed deposits. But the truth to be told, after tax deduction you get just 4-5% returns on your hand.

The Interest you earn from FD is fully taxable. it’s because earned interest is considered as an income from other sources. Hence, TDS is deducted from your income. Tax on interest earned will be charged as per the Income Tax Slab Rates

Tax on interest of Fixed Deposits

Truth behind Fixed Deposit returns

At the time of investment:-

Investing in FD can save a lot of your taxes as it falls under section 80C of Income tax act, 1961. To get the maximum exemption of Rs. 1.5 lakhs, you need to invest into FD which has minimum lock in period of 5 years. Although tax is exempted on the invested amount but in case the interest earned from FDs exceeds Rs. 10,000, then it becomes taxable.

TDS deduction on Interest Income:-

Bank deducts TDS on your Interest and deposit that to the govt. TDS is deducted on interest income when it is accrued but not when the Fixed deposit gets mature. In other words the TDS is deducted & deposited in your account on yearly basis. You can verify the TDS deposited by bank from your 26AS or requesting for Form 16 A from the bank.

TDS is deducted @10%,if the interest income is more than Rs. 10,000. However, if you don’t submit your PAN card, bank deducts TDS @ 20% on your interest income.

The good news is that TDS deducted can be adjusted against your total tax liability.

Don’t want bank to deduct your TDS? Click here to read.

What if TDS is not deducted?

Even if TDS is not deducted every year, Add the interest income in your total income . Because if you don’t, then in the last year(i.e.5th Year), consequences will be –

  • You get income tax notice for not reporting your income .
  • The year in which it is added, puts you in a higher tax slab thus resulting in higher tax payment.
Let me explain you with an example-

Suppose Aakriti has an income of Rs. 9.5 Lakhs. hence she belongs to the 20 % tax bracket. she has a FD of Rs 2 lakh with a bank that gives her 8 % interest per annum. So, the interest she earns on the FD for the current financial year is Rs 16,000 .(Remember, banks tax FDs at 10 percent only.)

Now, Aakriti is liable to pay tax on the interest she earns at the same tax rate as she pays for her gross income.

Hence, total tax Aakriti needs to pay on interest earned is :

20% of Rs 16,000 = Rs 3,200

The bank deducts TDS of 10% on interest income:

= 10%of Rs 16,000 = Rs 1,600

Therefore, the balance tax payable by Aakriti is 3,200 – 1600 = Rs 1,600

So, Total tax Aakriti needs to pay extra Rs 3200 .

Interest from FD for 5 years will be:

Rs. 16,000 * 5 = Rs. 80,000

Interest is taxable whether you pay it yearly or not.

Before, Aakriti was showing an income of Rs. 9,66,000 every year.

But in case if she hadn’t been paying taxes on her interest income, then after maturity period of FD her income will be Rs. 10,30,000.

So this added value leads her into the 30% tax bracket. This means she will have to pay more tax.

Hence the addition of such a large amount in the 5th year would result in more income tax payment.

Still confused how you calculate the adjustments in your TDS calculation. Tax2win will automatically do this for you.

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Team Tax2Win