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?

318 comments

  • Hiren

    Dear Suresh

    I am a NRI and I plan to deposit 1 crore rs in fixed deposit @ 9% interest rate. I am failing to understand completely the tax charged on fixed deposists. Can you please tell me, what would be the net interest rate I would get from bank after paying TDS on fixed deposits?

    Thanking you in advance.

    Best regards

    Hiren

    • Hiren, 1) Banks would deduct TDS if the interest income is exceeding Rs 10,000 in a financial year. 2) Irrespective whether bank is deducting or not, such interest needs to be added in the individual’s income and necessary tax should be paid. So, net net, it depends upon in which tax bracket you are falling. If you are NRI and income generated in India is falling under say 20% tax bracket, you need to pay 20% tax on the interest on Bank FD also. If you are getting 9% interest, then 20% of this i.e. 1.8% interest needs to be paid by you towards income tax. Pls let me know whether your doubt is clarified. Enjoy your day.

  • Prasanna VM

    Hi,

    wat will happen if someone having more total income than the taxable amount and if he submits the form 15g for Non-TDS dedcution??

    • Prasanna, Banks would not verify your income statements. You are submitting the form 15-G saying you would take care of the income tax formalities. Hence  bank would not deduct TDS. However income tax needs to be paid by you based on your tax brackets and the responsibility lies with you.

  • Soni

    Dear Suresh,

    Knowledgable article. I would like to know the following: I am paying Income tax and my wife is a housewife and having PAN card. Is she eligible to submit Form 15G and eligible for no tax deduction from Bank on FD?? If yes, what is the limit of Interest for whcih bank will not deduct TDS on submission of Form 15G??

    rgds

     

    • Vivek, the rule applies for you applies for your spouse too. Bank would not deduct TDS if the interest income in a financial year (all FD’s, all branches) is Rs 10,000.

  • Ravikumar N

    Dear Suresh,

    Good article, but expecting more info on this article. Based on your article, what my understanding to reduce the tax is, investing the FD in the name of a spouse, who's earning lesser income. Is this the only option to reduce the tax in case of FD investments?

    Thanks

    Ravi N