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?

Suresh KP

318 comments

  1. Dear Sir

    Thank you for a good article. My mother is not earning anything but having fixed deposits ans the interest goes above 300000. Is this possible to get 80 c in 1 lakh

    Please reply

     

  2. Dear Suresh,

    I am an NRI based in Dubai. Have some FD's in a bank totalling INR 16 lacs @9.5% for 7 years! I do not have any other source of income in India! The interest is approx INR 150,000 per year? If I submit form 15G and PAN CArd, bank will not deduct TDS. What is the exemption limit of total income for me to not file returns?

    Godfrey Alemao 

    1. Hi Godfrey, You can submit form 15 so that bank would not deduct TDS. Now if the taxable income exceeds the exmption limit of RS 2 lakh, you need to pay tax, else no tax. Also would like to know why you are not opening NRE account. Interest earned in NRE account is tax free. Please talk to your banker if you can open an NRE account now. If you like my blog, please give me a facebook like 🙂

  3. Dear Mr. suresh

    1. I plan to fixed INR 1500000 in a Bank , The total interest i'll get INR 139000 in a year as i check & i will take intereset monthly basis (MIS), I have no extra income now (No other Job) & i have one LIC policy which i pay INR 36000 per year , so can you tell me if i file From 15G then if i need to pay any tax or not?? I have already update my pan card.

    2. 2nd i fixed INR 350000 in my wife's(she is home-maker) account for 120Months the total interset shown INR 502316 , So how much tax we need to pay for this ,

    Thanks in advance to you ,

    1. Hi Sankarson, Point no.1, you can submit Form 15 and bank would not deduct TDS. Since your income is not crossing Rs 2 lakhs you need not pay any tax. 2) If you are investing Rs 350,000 in your wife name (ensure she has PAN card), the annual interest would be approx 30,000. You can submit Form 15 and there would not be any TDS. Since the amount is less than taxable income, you need not worry on that

  4. Hi Suresh,

    Excellent blog. I'm living abroad and have NRE fixed deposits. Do I need to pay tax and file tax returns?

     

    1. Paramesh, Interest receivd in NRE account is exempted from income tax. Pls see the RBI circular for ready reference.

      If you have taxable income above the exemption limit(Rs 2 lakhs for current fin year), you need to file return. Good to know that you have liked the blog. Please share one of your favorite article from my blog on your facebook so that your friends may also get benefitted. Please do let me know in case you need any further help.

  5. i have done FD of 2 lakhs , i got interests more than 10000, i dint submit form 15G and i am a student.this is my only source of income. now u tell me can i get my tax money back,because it deducted around 70000.

    1. Hi Kundan, Rs 2 lakhs investment cannot fetch Rs 70,000 interest. You can re-check. But once the TDS is deducted by bank, you cannot claim that back from bank as they deposit TDS every month into Govt account. You can do one thing. If you have a PAN card, when you file IT return, you can apply for IT refund. However it would take more than 1 to 1.5 years to get the refund. I am not sure whether as a student, you have a PAN card ?

        1. Kundan, Recent news is that from this financial year, you need not file ITR if your income is less than Rs 5 lakh. Please check your total income and proceed.

          1. hi suresh
            already i told u i m student my total income is that much 25000 in a year.
            now u tell me what cai do?
            tell me full procedure sir

          2. My dear friend, Pls follow this process. 1) File the IT return by adding the FD interest and compute the total taxable income. Since you are student, there would not be any other taxable income. 3) When you file IT return, it should indicate that FD interest is deducted and needs to be refunded. 4) The refund can come anywhere between 1 to 1.5 years after filing the IT return.  5) It would get credited to bank account specified in IT Return.

      1. for getting return what i have to do?

        tell me full procedure, i m totally new in this

         

        1. Pls consult tax consultant who would help you in filling the IT Return along with all the details. While he computes this, the last line item is where your tax refund would appear. You would get refund within 1 to 1.5 years after you file the return.

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