A Complete Guide to Income Tax On Fixed Deposits
Rajesh Verma was shocked when he got a tax notice from the Income Tax department in 2015. He had always been a diligent taxpayer, but he had neglected entering the details of his dividends for a Fixed Deposit (FD) account. As a responsible taxpayer, Rajesh cleared the tax amount at once. He learned from his mistake and now remembers to pay tax on all his fixed deposit investments every year.
How Is a Fixed Deposit Taxed?
Suppose the interest earned on an FD is more than Rs.10,000 per year. Then you may have to pay TDS (tax deducted at source). The IT department deducts this amount right from your FD account. But this happens only when you link your PAN card with your bank account. Suppose your PAN card is not available. Then you might have to pay TDS at the rate of 20%.
Are Senior Citizens Taxed On Fixed Deposits?
Senior citizens do not have to pay TDS on interest earned from their FDs. The IT department gives this benefit to all senior citizens of India. But you have to submit Form 15H to qualify for it.
What Happens If My Total Income Is Lower?
Suppose your total income is below the lowest tax slab of 10% and you are a senior citizen. Then you can claim a refund on the TDS on your FD. You can do this when you are filing your returns. You can also submit Form 15G to your FD account provider letting them know your income. This ensures that the financial institution does not deduct TDS at all. However, if you fall in the general category, you do not have to claim refund. Your income tax liability has been paid.
What Happens If My Total Income Is Higher?
Suppose you fall under a higher tax bracket of 20% or 30%. Then you may have to pay extra tax on your FD interest earnings. For example, Sheela falls under the 30% IT slab. She has a fixed deposit of Rs.8 lakh at a rate of 8%. So, she earns an interest of Rs.64,000 per year. As per the rule, she has to pay 30% of the earnings to the IT department. So, she has to pay a total tax of Rs.19,200. The TDS deducted on her FD is Rs.6,400 at 10%. She pays the remaining amount of Rs.12,800 as part of her Income tax dues.
Application of Section 80C On Fixed Deposits:
You have to pay income tax on all FDs. But some FDs can help you in saving tax too. This is not related to TDS. This is because of the provisions of Section 80C of the Indian Income Tax Act, 1961. 5-year FD schemes are eligible for tax deductions. These are the tax-saving FDs. The amount you invest in the fund is tax-deductible. You can subtract it from your total taxable income. A tax-saving FD always has a term of five or more years. It is important to note that all FDs are not tax-saving ones. These are special products available from a few banks and NBFCs. Speak to your financial institution before opening an FD to save tax.
To sum it up:
An FD is a taxable investment. So, you must remember to pay the correct taxes for your FDs. Also, remember to link your PAN card with your bank account. This enables auto-TDS deduction at lower rates. Suppose you are liable to pay more tax over and above the TDS. Clear your dues at once to avoid legal notices later. Suppose you are looking to save tax with your FDs. Then invest in a tax-saving FD scheme. Speak to your bank or NBFC before opening the FD. This can help you to get the most benefits.