NEW DELHI: Fixed deposits (FDs) are one of the most favoured instruments among investors as
it provides guaranteed fixed returns and safety of capital. However, interest on fixed deposits is fully taxable, and this somewhat reduces the appeal of FDs. It will be added to your gross income and taxed at the slab rates that relate to your total income.
Banks are required to deduct tax at source or TDS at the rate of 10 per cent on FD interest. However, in case your gross interest income from all FDs with the bank is below Rs 40,000 per year, you need not pay TDS on the interest earned. For senior citizens, aged 60 and above, this cap is Rs 50,000. In case the depositor fails to submit a permanent account number (PAN) the bank will deduct TDS at the rate of 20 per cent.
To prevent the bank from deducting TDS, you need to inform the bank that your income is below the exempted limit. You can submit Form 15G or 15H to the bank. These are self declaration forms in which you give an undertaking that your income is below the exempted limit. Also, no TDS is deductible when your total income is less than the minimum taxable amount. For instance, some investors may have more than Rs 40,000/50,000 interest income in a year, but their total income (including interest income) is less than the minimum exempt income.
When there is no tax payable by the individual, the bank cannot deduct TDS. For individuals aged below 60 years, income below Rs 2.5 lakh is tax exempt. For those aged above 60 but below 80, income up to Rs 3 lakh is tax exempt. Those aged above 80 years, income up to Rs 5 lakh is tax exempt. However, in such cases, the bank will not deduct TDS only where you submit Form 15G or 15H to claim interest income without TDS.
Form 15G (for non-senior citizens) and 15H (for senior citizens) should ideally be submitted at the beginning of the relevant financial year to avoid the whole hassle of additional TDS deduction and subsequent refund from the Income Tax Department. For instance, to avoid TDS in the current fiscal year (FY22), you should submit the forms now. It has to be submitted at every bank where you have a deposit.
Tax benefits on investment in FD
An individual can claim deduction up to Rs 1.5 lakh in a financial year (under Section 80C of the I-T Act) for investments made in fixed deposits. The amount so invested is deducted from income to arrive at the taxable income.