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. Suresh,

    My sister wants to Invest abt 7.5lks for  her daughters marriage (6 yrs) down.. What are the best options she has to get max returns(double or near double)(thru bonds,FD's with relative less risky not equitiesMF not sure if it;s a good option)??

    Please provide a list which i can suggest her.. She is a home maker(not much of finance knowlege, i need to be front end for her investments)

     

    1. Hi Ram, If you are looking for risk free investments, investment in FD or Debt mutual funds or Post office TD would be a good option. Debt mutual funds, you can expect higher returns compared to Bank FD or Post office FD.

  2. Tell me one thing is TDS also deducted on the intrest which we get from our Savings bank account?

    1. Hi Jasmeet, Interest on Savings Bank account is exempted from TDS as per section 194A of IT act. BTW how is our blog and what suggestions do you make to improve our blog. Are you able to see what you are searching for ?

      1. Absolutely.. I Love your blog!! Ya i want to suggest a topic which you should discuss!! Students like me who has just finished his gradution, finds it difficult where to invest with your money. So i would like to tell you to please write a topic on Safe investment options available for young graduates and also the basic terminologies related to banking which we should all know for managing our finanaces better!! Sometimes its difficult for us to understand the jargons which are used

  3. I have income of Rs.200000 p.a. If I have an additional income of Rs.16000 from FD interest in a year,

    bank will deduct 10 percent on Rs.600. Therefore, the net FD interest is Rs.15400. Is this Rs.15400 taxable income?

    1. Shah, I will answer your question in three parts. 1) Please fill form-15G and tell the bank not to deduct TDS. They won’t any deduct. You would get Rs 16,000 as interest in your account. 2) You indicated that your income is Rs 200,000 and if there are any deductions, your taxable income should be less than Rs 180,000 (after deductions from HRA, PF etc.,). If you add your 16,000 taxable income to this, your total taxable income should not exceed Rs 200,000 and you need not pay any tax. 3) Assuming that what you indicated Rs 200,000 is taxable. Then your FD interest of Rs 16,000 would be added to this and you need to pay 10% of income tax over and above Rs 200,000 (upto Rs 2L IT is exempted). The income tax on Rs 16,000 would be Rs 1,600. Looks you confused with Rs 10,000 interest tax exemption. If your interest croses Rs 10,000, bank would deduct TDS on total interest amount (Rs 16,000 x 10%) and not on Rs 6,000 (16,000-10,000)

  4. Dear Mr. Suresh

    This is a very nice article, myself and my wife are working in gulf. We are having FD and RD for our children, do the bank will deduct TDS, as the source for this FD and RD are from my NRI account. I am having PAN card for me and for my children.

    Please advice me as i had invested my whole savings. Also please explain, the tax 10% and above is on the interest or on the amount i had deposited?

    I had read in some article that NRI FD are non taxable, if it is so can i convert these FDs to NRI FD.

    Please help me, i am waiting for your replay..

     

    Thank You Very much.

     

    1. Hi, TDS amount of 10% is deducted on your returns and not on investment. There is no such provision that NRI FD is not taxable. You can submit Form-15 to bank and they would not deduct TDS. However the returns need to be shown as income from other sources in your IT return and necessary tax need to be paid by you based on income tax slab. Since you are NRI, your income from such FD’s may not reach taxable income and hence you may not be paying any tax. However this depends upon your total income in India.

  5. Dear Sursh

    I am NRI. I have a FD in a bank in India which matured this month. Interest I received is above 10000. Bank deducted entire interest as Tax. I was under the impresession 10% of the Interest I will receive will be deducted as tax. I dont understand why whole interest amount was deducted as Tax.

    Appreciate your response.

    Thanks

    1. Asim, Bank cannot deduct 100% as TDS. There is something wrong. Pls contact bank customer care and check what exactly happened.

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