How is a Fixed Deposit taxed in India?

Fixed Deposits are a popular investment in India, offering safety and assured returns. However, it is essential to understand the tax implications of FD interest to manage your finances effectively.

Taxability of FD interest

The interest earned on FDs is fully taxable and forms part of your total income under the head "Income from Other Sources." This interest is added to your income and taxed depending on the applicable income tax slab rates.

Tax Deducted at Source

Banks deduct TDS on FD interest if the interest income exceeds certain thresholds:

• Individuals below 60 years: TDS is deducted if the annual interest income exceeds Rs. 40,000.
• Senior citizens (60 years and above): TDS is deducted if the yearly interest income exceeds Rs. 50,000.

The TDS rate is 7.5% for both categories if the PAN is provided. If PAN is not provided, the TDS rate increases to 20%. 

Tax-Saving FDs

Tax-Saving FDs with a five-year lock-in period are eligible for deductions under the Income Tax Act, up to Rs. 1.5 lakh per annum. However, the interest earned on these FDs are taxable. The TDS provisions applicable to regular FDs also apply to Tax-Saving FDs.

Submission of Form 15G and 15H

To avoid TDS deductions:

• Form 15G: Individuals below 60 years can submit this form if their total income is below the taxable limit.
• Form 15H: Senior citizens can submit this form if their total income is below the taxable limit.

These forms are submitted at the time of opening the FD or at any point during the financial year.

Tax on Cumulative vs. Quarterly interest FDs

• Cumulative FDs: The interest on an FD is compounded quarterly and paid at maturity. The interest earned each year is added to the principal and taxed accordingly.
• Quarterly interest FDs: Interest is credited to the account quarterly and is taxable in the respective quarter.

Advance tax liability

If your total tax liability, including FD interest income, exceeds Rs. 10,000 in a financial year, you need to pay advance tax in four instalments. Failure to do so may result in interest being charged under the Income Tax Act.

Using an FD calculator

An FD calculator estimates the maturity amount and the interest earned on your FD. This tool considers the principal amount, interest rate, and tenure to provide an accurate calculation, helping in tax planning and financial decision-making.

Include FD interest in ITR filing

Many investors mistakenly believe that if TDS has been deducted, there is no need to report FD interest separately. However, you must declare the total interest earned from all FDs in your Income Tax Return, even if TDS has been deducted. If your total tax liability exceeds the TDS amount, you must pay the balance tax. Conversely, if excess TDS has been deducted, you can claim a refund while filing your ITR.

Conclusion

Knowing the tax implications of FD interest is important for effective financial planning. By staying informed and utilising available tools and forms, you can manage your FD investments efficiently and minimise your tax liabilities.