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

  • Pavit

    Hi Suresh

    Thanks for taking the time to pen it down for us and following it up, you're being great help. I have a problem I can't seem to fix. My total taxable income is 2,26,080 so the tax payable is 2686. I made an investment of 25000 in Mar '13 towards Post Office Saving Account but I couldn't declare it because my company finance had blocked investment declaration by then due to year-end. Can I declare it now and get a refund? I can't seem to find that option on any site. Please help..

    Regards

    Pavit

    • Pavit. 1) Which post office saving scheme you have invested. All Post office schems are not eligble for tax exemption under 80C. Only NSC or 5 year Post office TD are eligible for 80C exemption. If you have invested in any of these two, you can claim this as deduction under 80C. So your total taxable income would be Rs 226,080 minus 80C exemption of RS 25,000 = Rs 201,080. You need to pay tax on Rs 1,080 @ 10% + edu cess on it. Since TDS is already deducted for RS 2,686.Please fill your ITR online or by manual ITR so that you can claim the refund of balance. If tax auditors are coming to your company to help all employees you can submit relevant docs and claim exemption. 

  • mahesh kumar

    Hi suresh,

    i done with fixed with sbi bank and while filling itr online i am able to know my bank paid as interst 7212 and 1312 as tds and my taxble income is 846560 for that my employer issue form 16 . whether i need to pay any tax for the same .i did not disclose my interst information with my employer.

    • Mahesh, Since you are falling under 20% tax bracket, you need to pay 20% interest on your bank FD too. But looks bank has deducted less amount. Please check online ITR return and compute your taxable income by adding FD interest and if any difference is there, you need to pay tax online before filing the ITR

  • pavan

    hello suresh,

    thanks for the article, its very helpful.

    my story is , my father is a pensioner from central govt. of 10000/month and he wants to invest his money in FD's. he is planning to invest 5lacs in a mututal(father+mother) FD scheme in which interest has to draw every month. and another 5lacs on my name(son) for 1 year without drawing any interest. we hav only my father is the source of income. so my queries are,

    1) whether we hav to pay tax for this FD's.

    2) which FD's are good whether mutual are individual which helpful to my mother with tax free.

    3) will i hav to pay tax on my individual FD. if so, suggest a good Tax free scheme 

    clear my queries and suggest a good FD schemes of above.

    thanks

    • Interest on bank FD, you should club entire interest amount in your IT Return and pay tax as per your income tax slab. 1) Rs 5 L FD (father+mother) – You may get Rs 45,000 (9% interest), your father need to pay tax on this based on his tax slab. Since he is retired and he is getting Rs 10,000 only, his total income would be Rs 120,000 + Rs 45,000 (Inteest) which is within the limit of tax exemption of Rs 2 L, hence no tax is payable 2) Since your monther do not have other income and if your father deposits in your mother name, the interest would be clubbed in your father’s income and tax needs ot be paid 3) It depends on your taxable income. If your taxable income is exceeding Rs 2 L, then adding this interest would make it taxable and you need to pay tax. You can refer our regular monthly bank FD articles and choose a high interest rate bank and invest in them

  • Surendra

    Thanks for the very informative article.

     

    Want to know the how we can show the interest earned by the savings account while filing the returns. Also, how I can claim the relief of Rs 10,000/- in the ITR form.

    Best regards,

    Surendra

    • Surendra, If the interest on SB account is < Rs 10,000, it is exempted from TDS and you need not show this income. However if it is FD interest, entire amount is taxable

  • SJM

    Dear Mr. Suresh,

    I had taken NRF loan from my PF for buying a home but unfortunately I have to cancel the booking. Now, I have made FD of this amount  in Mother's name who is Housewife and technically is not dependent of mine. Interest is crossing 10,000/- Limit. I want to know whether I need to pay income tax on the interest amount or she needs to pay. Also I would like to know whether interset crossing 10,000/- towards savings account in a F.Y. also attract income tax. Pl. advice. Thank you.

    • Hi SJN, the FD is in your mother name, hence if you can prove that she has some income, you can avoid this tax, else this interest would be clubbed under your income and IT has to be paid by you. Also any interest if exceeds Rs 10K would be taxable on full amount