Tax on FD Interest: How to Pay Income Tax on Fixed Deposit Interest Income? (2024)

Fixed Deposits (FDs) allow you to exploit the complete potential of Section 80C to deduct Rs 1.5 lakh from your taxable income. It also ensures capital protection along with some interest returns. However, the interest income earned on the fixed deposit is taxable. Seldom do investors think about paying tax on the interest income on time. This article will cover when and how to pay income tax on FD interest income.

How is interest income taxed?

Interest income from fixed deposits is fully taxable. Add it to your total income and get taxed at slab rates applicable to your total income. It is to be reported under the head ‘Income from Other Sources’ in your Income Tax Return.

Banks deduct tax at source at the time of crediting interest to your account if the amount of interest is beyond Rs 40,000 for individuals other than a senior citizen (in the case of senior citizen the threshold is Rs 50,000).

Hence it should be remembered that the TDS is deducted at the time of credit of interest and not when the FD matures. So, if you have an FD for 3 years – banks shall deduct TDS at the end of each year. (See below for more details on TDS on FDs).

Core Banking Solutions (CBS):

CBS enables the banks to provide centralised services to their customers. In the case of the banking institution which has adopted Core Banking Solutions, the interest credited in respect of Fixed deposits by all the branches of the bank is aggregated to arrive at the total interest credited in order to know whether the aggregate amount comes within the ceiling limit for deducting TDS.

It can be understood with the below example.

Mr. A made three fixed deposits of Rs 2,50,000 each at 9% with the Dwaraka, Janakpuri & Rohini branches of XYZ bank which has adopted CBS. In this case, despite of the annual interest being Rs 22,500 (i.e. 2,50,000*9/100) individually, which is within the prescribed limit of Rs 40,000, the bank needs to deduct TDS @ 10% under Section 194A considering the aggregate amount of interest credited by all branches exceeds the threshold limit of Rs 40,000.

Understanding TDS

When you receive certain payments, the person paying you has to deduct tax before making the payment. This tax deducted at source is called TDS, which they pay to the Central Government.

You will receive the credit of the amount net of tax. You then have to add the gross amount to your income while reporting it in your income tax return. As against this, the credit of TDS is also provided from the total tax liability or a TDS refund is offered in case of nil tax liability.

For example, if you earn FD interest of Rs 100, the bank would deduct 10% TDS i.e. Rs 10 and deposit it to the government. While reporting the interest income in ITR, you have to report the entire interest earned of Rs 100 in your ITR and claim the TDS deducted by the bank of Rs 10 as a TDS refund or tax credit from the outstanding liability, as the case may be.

TDS on Recurring Deposits (RDs)

Recurrent Deposits are deposits made on a recurring basis. For example, a Rs 10,000 per month RD. Interest on RDs is completely taxable according to your tax bracket. Senior citizens, on the other hand, are exempt from tax on the interest income from RDs/FDs up to Rs 50,000 per year. TDS provisions on RDs are the same as TDS provisions on FDs. TDS is levied on RDs if the interest payable in a single bank exceeds Rs 10,000.

How to calculate tax on interest income?

Add the interest income to your total income in your Income Tax Return each year (even though, it may not be paid out). Interest income is to be reported under the head ‘Income from other sources’ while filing ITR. See which tax slab rate you fall into.

The income tax department will adjust the TDS (which has already been deducted) against your final tax liability.

If the bank does not deduct TDS from your interest income, the total interest income earned from your fixed deposits in a particular financial year is to be added to your total income and pay tax on it.

It is not advisable to wait until the maturity of your FD when interest is actually received– to report the interest income. This is because the accumulated interest may push you up to a higher slab and you may end up paying more tax.

You can view the details of TDS deducted on any of your income by viewing your Form 26AS and total interest from FDs, RDs & savings bank accounts from yourAIS.

Let’s understand this by way of an example:

  1. Ritwik falls in the 20% tax bracket. He has 2 Fixed Deposits with a bank of Rs 1,00,000 each for a period of 3 years @ 6% interest per annum. In the first year, Ritwik’s interest income is Rs 6,000 from each of the FDs, total interest accrued is Rs 12,000 in the first year. The bank does not deduct TDS for annual FD interest below Rs 40,000.
  2. Another example, Mr. Anurag has a fixed deposit of Rs 10 lakh @ an interest rate of 6% p.a. He receives an annual interest of Rs 60,000. The bank deducts TDS on the whole of Rs 60,000 at 10% i.e. Rs.6,000. The prescribed rate of TDS is 10%.

When to pay tax on interest income?

If there is a tax liability on adding interest income to your total income, then the same is required to be paid while filing your income tax return for the financial year. This is how you can pay any tax that is due.

However, if the tax payable after the inclusion of your interest income in your total income is more than Rs.10,000 – then you are liable to pay Advance Tax. Hence the rules of quarterly payment of advance tax in instalments are to be compiled.

Understanding TDS in relation to FDs

When does the bank not deduct TDS:

If your interest income from all FDs with a bank is less than Rs 40,000 in a year, the bank cannot deduct any TDS. The limit is Rs 50,000 in the case of a senior citizen aged 60 years and above. It is governed by section 194A of the Income Tax Act.

Prior to Budget 2019, the limit of TDS on interest income was Rs.10,000.

When does the bank deduct TDS @ 10%

The bank estimates your interest income for the year from all the FDs you have with the bank. There would be a 10% TDS deduction if your interest income exceeds Rs 40,000 (Rs 50,000 in the case of senior citizens). Prior to Budget 2019, the limit of TDS on interest income was Rs. 10,000.

The threshold limit to make TDS on FDs is as below

Interest paid

Threshold limit

Senior citizen (Rs)

Other person (Rs)

Co-operative
engaged in business

50,000

40,000

Co-operative engaged in the banking business

50,000

40,000

Primary Agricultural Credit Society

50,000

40,000

Co-op. Land Mortgage Bank

50,000

40,000

Co-op. Land Development Bank

50,000

40,000

When does the bank deduct TDS @ 20%:

In case you do not provide your PAN information to the bank, they will deduct 20% TDS. So make sure that the bank has your PAN details.

When your overall income is less than Rs. 2.5 lakh

No TDS is deductible when your total income is less than the minimum taxable amount. Some investors may have more than Rs 40,000 in interest income in a year, but their total income (including interest income) is less than the minimum exempt income (Rs 2.5 lakh for FY 2019-20).

When there is no tax payable by the individual, the bank cannot deduct TDS. However, in such cases, the bank will not deduct TDS only where you submit Form 15G or 15H to claim interest income without TDS.

How to ensure zero TDS deduction by the bank

The only way to make sure that no TDS is deducted by the Bank is when your total income is not subject to tax and you submit Form 15G and Form 15H to the bank before the due date.

Submit these forms at the beginning of each financial year to avoid the whole hassle of additional TDS deduction and subsequent refund from the IT Department.

Interest from FD for senior citizens

Senior citizens receiving interest income from FDs, savings accounts and recurring deposits can avail of income tax deductions of up to Rs 50,000 annually. This is by way of an amendment vide Finance Act 2018.

Please read out the detailed article on this here, where we have discussed provisions of section 80TTB. If the senior citizen’s interest income from all FDs with a bank is less than Rs 50,000 in a year, the bank cannot deduct any TDS.

Income tax on fixed deposit interest for a housewife

I am a homemaker. I have invested Rs. 5 lakhs in a bank FD in which I am getting interested after tax deduction(TDS). Do I need to file my tax return? Can I submit Form 15G to the bank if I have no other income? How to get back the refund of the tax deducted?

Banks and other financial institutions deduct tax at source(TDS) before paying you the interest income on FD.

You will have to file an income tax return if your total income exceeds thebasic exemption limit. If not, you will not be required to pay tax. If, however, tax is deducted from your income, you can claim a refund while filing your return.

To receive interest without tax deduction, Form 15G and 15H can be submitted, but your income should be below the basic exemption limit of Rs 2.5 lakhs or Rs 3/5 lakhs, respectively, and the tax payable should be zero.

Form 15G is to be submitted by people below the age of 60 years, and Form 15H by people of 60 years or more.

  • If your age is 80 years or more:You can file Form 15H only if your taxable income is less than Rs 5 lakhs.
  • If your age is 60 years or more but less than 80 years: If you are a senior citizen, you can file Form 15H only if your taxable income is less than Rs 3lakhs.
  • If your age is less than 60 years:If you are not a senior citizen, you can file Form 15G only if your total income is not more than Rs 2.5 lakhs.

Related Articles

New tax regime-Section 115BAC

Calculate taxes- Income Tax Calculator – FY 2024-2025, AY 2025-2026

Income Tax in India : Basics, slabs and E-filing Process 2024-25

Tax on FD Interest: How to Pay Income Tax on Fixed Deposit Interest Income? (2024)

FAQs

Tax on FD Interest: How to Pay Income Tax on Fixed Deposit Interest Income? ›

How is interest income taxed? Interest income from fixed deposits is fully taxable. Add it to your total income and get taxed at slab rates applicable to your total income. It is to be reported under the head 'Income from Other Sources' in your Income Tax Return.

How is interest on fixed deposit treated in income tax? ›

Is fixed deposit interest taxable in India? According to the Income Tax Act, 1961, interest on FDs is treated as 'income from other sources' and hence, is fully taxable. The FD interest earnings are included in your gross annual income, and the tax liability is estimated, following the prevalent tax laws.

How to calculate FD interest for income tax? ›

There is TDS (Tax Deducted at Source) on FD interest along with any applicable surcharge or cess. For example, if your total annual income is above Rs 10 lakh, you fall into a 30% tax slab. If the interest earned on FD is Rs 1 lakh, you will pay Rs 31,200 as tax (30% income tax plus 4% cess on tax paid).

How to file ITR for FD interest? ›

It comes under “Income from Other Sources” while filing an income tax return. FD Interest is taxable at your slab rate along with applicable surcharge/cess. In the case of fixed deposits, the bank or financial institutions deduct tax at the source at the end of each year when they pay the interest.

How do I use my FD for tax exemption? ›

The Fixed Deposit Income Tax exemption can be claimed on investments of up to ₹ 1.5 lakh. The lock-in period is five years. The interest earned, as a part of the Tax Saving Fixed Deposit is taxable and is deducted at source. Premature withdrawals, Loans or Overdraft (OD) facilities are not available for a Tax Saving FD ...

How is fixed income interest taxed? ›

Interest income, which is typically paid on a semiannual basis. Whether this income is taxable will depend on the issuer. Interest from corporate bonds is generally taxable at both the federal and state levels. Interest from Treasuries is generally taxable at the federal level, but not at the state level.

How to get back TDS deducted on FD? ›

How to claim TDS Refund Online
  1. Pre-validate the bank details by entering the bank account number and IFSC and nominate the bank account for refund.
  2. After registration, you can file your income tax return by downloading the relevant ITR form.
  3. Fill in the requisite details, upload the Form and click on submit.

Is 5 year FD tax free? ›

The tenure for a tax saving fixed deposit is 5 years. It offers a tax deduction under Section 80C of the Income Tax Act, 1961. It has a lock-in period which means that you are not allowed to withdraw prematurely. The interest earned on the deposits is taxable.

How much tax will I pay on interest income? ›

Typically, most interest is taxed at the same federal tax rate as your earned income, including: Interest on deposit accounts, such as checking and savings accounts. Interest on the value of gifts given for opening an account.

How to avoid tax on interest income? ›

If you're a higher earner, you may consider municipal bonds, muni bond funds or muni money market funds, experts say. There are no federal taxes on interest accrued on these assets and you could even avoid state and local levies, depending on where you live.

Which income tax form for FD? ›

Form 15G is a declaration that can be filled out by fixed deposit holders (individuals less than 60 years of age and HUFs) to ensure no TDS is deducted from their interest income for the fiscal year. Form 15G is available under Section 197A of the Income Tax Act of 1961.

How do I file taxes on interest income? ›

Interest on bonds, mutual funds, CDs, and demand deposits of $10 or more is taxable. Taxable interest is taxed just like ordinary income. Payors must file Form 1099-INT and send a copy to the recipient by January 31 each year. Interest income must be documented on Schedule B of IRS Form 1040.

Do you have to pay tax on accrued interest? ›

This type of interest is taxable to the seller and not the buyer where the interest that is earned from the date of the purchase to the end of the end of the year is taxable by the purchaser.

What is the difference between FD and tax saver FD? ›

There are two types of FDs Tax saver FDs and regular FDs. Tax saver term deposits come with a lock-in period of up to 5 years, while for normal FDs the tenure ranges from 7 days to 10 years. Regular FDs do not provide tax benefits and only tax saver FDs provide tax benefits.

Can I break tax saving FD? ›

A Tax Saver Fixed Deposit has a lock-in period of 5 years. No premature withdrawals, loans or overdraft facilities are available against Tax Saver FDs.

What is the maximum amount you can put in a FD? ›

The answer to this query is simple; there is no maximum limit on the amount that can be deposited in an FD. It's crucial to understand that the highest amount that one can invest is subject to various factors, primarily determined by the policies of the FD issuer.

Is interest on fixed deposit an income or expense? ›

Interest on a fixed deposit is typically viewed as income, not an expense. This is because it adds to your bank accounts rather than taking away from them.

How is deposit interest taxed? ›

The IRS considers the interest earned taxable income, whether you keep the money in the account, transfer it to another account, or withdraw it. If you received a cash bonus for signing up for your savings account, you'll owe income tax on that amount. Your bank will report it on your 1099-INT form.

Does bank interest count as income? ›

Most interest that you receive or that is credited to an account that you can withdraw from without penalty is taxable income in the year it becomes available to you. However, some interest you receive may be tax-exempt.

What is the accounting treatment for interest on FD? ›

Accrued interest on FIxed deposit is shown in the credit side of Profit and loss account and added to Interest on Fixed Deposit if given. Accrued on fixed deposit is also shown in the Asset side of the Balance sheet.

Top Articles
Latest Posts
Article information

Author: Horacio Brakus JD

Last Updated:

Views: 5482

Rating: 4 / 5 (71 voted)

Reviews: 86% of readers found this page helpful

Author information

Name: Horacio Brakus JD

Birthday: 1999-08-21

Address: Apt. 524 43384 Minnie Prairie, South Edda, MA 62804

Phone: +5931039998219

Job: Sales Strategist

Hobby: Sculling, Kitesurfing, Orienteering, Painting, Computer programming, Creative writing, Scuba diving

Introduction: My name is Horacio Brakus JD, I am a lively, splendid, jolly, vivacious, vast, cheerful, agreeable person who loves writing and wants to share my knowledge and understanding with you.