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

  • Swamy

    Dear Suresh,

    While filling my e-filing, I got confusion about the other income details. I have 5 FD's matured during the period of 2012-13 financial year. But I didnt get any Form-16A from bank. Should I approach them personally?

    1) I do not know how to include these as returns in the ITR-1. All of them have been TDS done, is it still mandatory to add those to ITR-1?

    2) 2 items have been autofilled in the ITR-1 online form under other income from interst on FD. But I dont know if this needs to be updated, kept as it is or how…

    Please let me know

     

     

    • Swamy, Yes please approach your banks to get form16A  1) Yes please add else later you might get notice from IT that tax is not paid for interest income 2) Since you are filling online and based on your PAN card, system would have extracted whereever there is TDS deducted by bank.

  • veena

    Hi,

    I get a difference of Rs10 as tax payable (mainly due to the rounding off digits E.g: 48 is rounded up to 50 ; 42 is rounded to 40) row in the 2013_ITR1_PR6.xls downloaded from incometaxindia.gov.in website. The amount of tax deducted at source matches with the tax payable , if calculated on a tax calculator. Could you please let me know if I can submit the ITR with this tax payable amount of Rs.10 or is it necessary to pay this amount?

    Thanks,

    Veena

  • Gopal

    Suresh, how you say  exempted interest Rs.10000 is including both savings and fixed deposit interest ? To my knowledge, only savings interest is exempted. For FD interest any amount of interest is taxable. 

    • Gopal, What is said is correct and the same is reflected in the article too. Please inform whether there is any error in the article. I have gone thru this again and could not found any error. 

  • Kirti Azad

    I'm a government employee with annual income of 9 lakhs. I've a auto sweep account in SBI.As per form 26AS & form 16A by bank. Total interest for FY2012-13 is Rs 9832/- and TDS deducted is Rs 1088/-. Can i claim Refund for TDS deducted under section 80TTA? Which ITR form I've to fill while submitting ITR for AY2013-14?

    • Kirti, Interest on SB account is tax free upto Rs 10,000. Since your interest is FD, it would be taxable. You should include in your income and pay necessary tax. Looks bank has deducted tax of 10%+. Please add the interest to your total taxable income and arrive tax liability. Deduct Rs 1,088 and pay balance after educational cess.

  • K S Narayanan

    Dear Suresh,

    My only source of income is through Bank Fixed Deposits and that too is less than Rs 1.80 Lakhs. Do I need to file Income Tax retun for the FY 2012 – 13 ?

    Regards

    • Narayanan, Bank would have deducted TDS right ? If yes, since your income is not taxable, you can claim refund by filing ITR. If bank has not deducted TDS, you have an option as income < Rs 5 L they need not file ITR