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. Hello Suresh ! I am Akashdeep from Mumbai, I don't have much knowledge on investments and taxes so please guide me. My first question is that will the bank deduct TDS on my total interest earned from my fixed deposit and my savings deposit when it is above 10000 INR, or is it going to consider only the fixed deposit interest earned . I opened an RD of 20000 INR in the month of June in 2012 for 15 months maturing on Sept 2013. How will the tax be considered in my case ? because my interest earned is spilt in between two financial years.

    Thank You !

    Akashdeep Gogoi.

    1. Akankshdeep, Bank would not deduct TDS for RD account. You need to computer the interest earned for a financial year and indicate in ITR form and pay necessary tax. Rs 10,000 is total tax which includes FD + Savings interes

  2. Dear suresh,

    I have NRE FD,S  maturing in year 2020 with interest on maturity. I have come back to india for good. Do I have to show the NRE FD'S in my tax returns or I am exempt from incometax on these FD's. Also can I continue holding the NRE FD'S  till maturity although I am now a resident.

    thanks

    niranjan

    1. Niranjan, There are some guidelines regd this. If you have returned permanently to India, you need to approach your bank. They would first convert your account into normal resident account. However you would get returns on original fixed rate. The returns what you have been getting are not taxable. But once you convert to resident account, the returns are taxable as per your income tax slab.

  3. sir,would like to know,which ITR form to be filled for my mother aged 65 years & her income is only throughFIXED DEPOSITS interest around 2.00 lakhs p.a.

    thanks

    1. Samir, if the income is less than Rs 2 lakhs, the amount is exempted from tax. Point no.2, if the taxable income is < Rs 5L and necessary tax is paid, you need not file IT return. But if you still want to proceed you can fill ITR-1 and FD amount to be shown in "Income from other sources".

  4. Hi i have interest income on 7661. do i still need to show it in income from other sources. As this is below 10000, should i leave that coloum blank.

  5. Hi Suresh,

    After reading all your replies, I thought to get some expert advise from you.

    I am working in Saudi Arabia from more than 3 years. During this period I have visited India atleast 7 times for a duration ranging between 1 week to 1 month. I have 2 house property in India, I consider one of the house as Self Occupied for Tax purposes.

     I remit my salary to my Savings Bank Account in India. I have below queries.

    1.       I am filing my return from last 6 years while I was in India and I continue to do so even when I am staying in Saudi. I am doing so because of my current income earned from House Rent and Interest income on the deposits in India. These income clubbed together are not more than INR 200,000. Should I file my return this year.

    2.       While filing my return What should be shown as my Residential Status – Resident, Non Resident, Resident but Not Ordinarily Resident.

    3.       Should I need to show my salary from my employer in Saudi Arabia as Salary Income in the tax return. Currently there is no income tax in Saudi Arabia.

    4.       I don’t have any NRE/NRO account, I remit my savings to my  savings bank account in India. I have made Fixed Deposits to this bank. So there is Interest earned on the FD as well as on the savings accounts. Interest earned on FD is 50000 while interest on 2 different saving accounts is 15000 (INR 8000 and INR 7000) , How this interest would be accounted for in the return.

    5.       Is it mandatory for me to open an NRE/NRO account.

    6.       Do I need to close all my saving accounts in India If I opens a NRE/NRO account.

    7.       I provide part time  online consultancy to some US clients who are customer of a US Company based in Chennai. I raise my invoice to this Chennai  based company. After charging TDS, they deposit my consultancy charges to my Indian saving bank account. Should I show this income as “Income from Other Sources”

    Thanks

    Abhigya Raj

     

    1. 1) Yes you need to file ITR. 2) Residential status depends on how many days you were in India. Please go thru the guideline 3) When you file ITR in India, you need to show money which you first got in India. If you earned in Saudi and transfer the money to Indian account, it is not income in India. 4) Suggest quickly open NRE account to get repatriation and other benefits. You should include interest income in your ITR 5) You would have several benefits like repatraitaion and tax free interest 6) You need not close your exising saving account 7) Since the income is first received in India, you have to show this income. You can show this under “Profession”. For this you need to file ITR-4

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