Income tax on fixed deposit interest – can we save or avoid tax?

Income tax on fixed deposit interest – can we save or avoid taxIncome tax on fixed deposit interest – can we save or avoid tax?

Investors love to invest in fixed deposit schemes. However, though the banks are offering good interest rates, post TDS the returns are low. In this article we would articulate the various fixed deposit schemes, the income tax on fixed deposit interest and are there any ways to save the tax?

Bank fixed deposits schemes

Investment in bank fixed deposits offers a fixed income along with providing safety. There are several banks who are offering unique bank fixed deposit schemes. The current interest rates are varying from bank to bank which are around 7.5% to 10% p.a. The tenure of bank deposits are from 15 days to 10 year period. Currently there are various types of deposit schemes such as Term deposits/fixed deposits, recurring deposits and tax saving fixed deposits. Banks deduct TDS (Tax deducted at source) for any interest earned beyond Rs 10,000 in a year.

What are the TDS or tax on fixed deposit interest?

  1. Interest income < Rs 10,000: No TDS would be deducted
  2. Interest income > Rs 10,000 :If you have submitted PAN details, any interest beyond Rs 10,000 interest income, the TDS would be deducted @ 10% p.a. If you have not submitted PAN details, any interest beyond the limit, the TDS would be deducted @ 20% p.a.
  3. Submission of form 15G: In case the investment is done in the name of a spouse whose total income including the interest income is not exceeding the total taxable income, then your spouse can submit Form 15G to bank so that bank would not deduct TDS.
  4. Submission of form 15H: In case any senior citizen of > 60 years is invested in fixed deposit, they can submit Form-15H so that TDS would not be deducted.

Then, what is income tax on fixed deposit interest?

The interest on fixed deposit need to be treated as “Income from other sources” in your income tax return and appropriate income tax based on your income tax slab would be applicable. Please note that you need to  include total interest and not the differential. e.g. if you have received Rs 11,000, don't just add Rs 1,000 (Rs 11,000 minus Rs 10,000 exemption). You should add Rs 11,000.

Can we avoid or save tax on fixed deposit interest

It is not true that we can avoid or save tax on fixed deposit interest. Let us see the following scenarios.

Timing the FD: If we can invest in FD during middle of financial year, then the interest income for the financial year would be half of of the total interest and it would be < Rs 10,000 and we can avoid tax, how far this is true?

If this is the case, what happens next financial year? You may avoid tax temporarily for few months in current year and you cannot avoid every year.

Investing in various branches of bank to avoid tax: Can we avoid tax on fixed deposit interest by investing in various branches of the same bank? The answer is no. If you invest in various branches of same bank, banks would still treat them as single customer and club all interest income and compute TDS. You cannot escape.

Investing in various banks to avoid tax: Can we avoid tax on fixed deposits by investing in various banks? The answer is no. If you invest in various banks, they would treat them separately and if the interest income in a bank is not exceeding Rs 10,000, TDS may not be deducted. However when you file income tax return, you need to show the interest income on “Income from other resources” and you need to pay income tax at tax rate applicable for you. You may avoid TDS from bank side, but you still need to pay tax from your end.

Can we claim the TDS if it is wrongly deducted due to non submission of Forms to banks

If you have not submitted Form15H or Form 15G, you can get TDS certificate from the bank and claim the refund through your annual income tax filing. The process may take time, but you would get refund from income tax department.

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Suresh
Income tax on fixed deposit interest – can we save or avoid tax?

Article by Suresh

Suresh KP i.e. me have written 500+ articles on this blog. I love doing analysis and identifying the Best investment options.

318 Comments

  1. gajanan says:

    Dear Sir,

    I am a salary person and I have paid 30% income tax as per slab. now I have one FD at bank and bank has deducted TDS @10% on interest amount and paid to IT department. when i have incorporated it in ITR-1 it showing the diff amt of 20% on interest is to be payable.

    Now pl guide wheather as per IT rule I have to pay TDS on interest as per slab (ie 30% in my case) or already deducted @10% is correct.

    • Suresh says:

      Gajanan, Interest of bank FD would be added to your income and is taxable as per your income tax slab. If you are falling in 30% tax, you should pay as per this slab. If bank has deducted 10%, you should pay balance 20% + Educational cess. Please pay this amount thru online in any bank and submit the ITR

  2. Vignesh. S says:

    I have some basic doubts.

    1. When is E – Filing mandatory and when is manual filing mandatory?

    2. If the interest income of my wife and mother (on each account) is less than 2 lacs, do i need to file ITR?

    • Suresh says:

      Vignesh, There were no specific guidelines like that. Any one can do e-filing. However there was news that if taxable income is exceeding Rs 5 Lakhs one should file e-filing only. 

  3. patil says:

    i  have made 80c 5 year fixed deposit of amount 49,000 with SBI . So at the end of 5th year , will there be any tax deducted on the intrest . Few say that only if intrest exceed Rs10000  in year then only tax will be deducted , but few say that at the end of the 5th year what ever intrest earned is taxable . Kindly help with this confusion ..

     

    • Suresh says:

      Patil, Interest earned should be shown every year in your income tax return and necessary tax should be paid based on your income tax slab. If your bank has already deducted tax, you need to reduce that and pay balance only. Interest upto Rs 10,000 on SB account is tax free. However yours is tax saver FD which is like any other regular FD and necessary tax is applicable

      • Rakesh says:

        Hi Suresh,

        I am posting my queries since last two days but I don't get to see any reply. To add to that my posted queries are also deleted. If you don't want to reply or don't have time to reply then please do drop a message. It will help.

         

        Regards,

        Rakesh

        • Suresh says:

          Rakesh, Don’t get upset. I generally do not delete any message. I got more than 500 comments in last 48 hours+ and I do not have team to respond them. I have do it myself as this is free blog. Please have patience, I am clearing one by one.