Individuals opt to invest in Fixed Deposits (FDs) as an interest-bearing investment, which offers a regular return. Because the FD interest rates remain the same throughout the investment period, on the other hand, it’s also important to note that FDs have tax implications due to interest earned. Among such aspects is the TDS on FD interest. It is no different as it is a tax-deducted service where the government ensures payment of taxes.
The determination of TDS deduction in FD interest requires knowledge of what rates are applicable, what the exemptions are, and how you get the right deduction. This detailed guide will take you through the crucial steps and considerations of the TDS calculation for FD interest.
Table of Contents
What Is Fixed Deposit?
A Fixed Deposit (FD) is a financial product where an individual deposits money in a lump sum with the bank for a defined period at a predetermined interest rate. It is a safe investment that provides capital appreciation and returns assured.
The main reason why people invest in FDs is stability since the principal amount remains protected, and fixed interest rates ensure predictability. FDs are preferred by risk-free investors looking for a steady flow of income.
The interest on FDs is receivable at different frequency intervals, whether monthly, quarterly, semi-annually, or annually, based on the terms that determine when the investment was made. Various banks offer different interest rates and tenure, so customers can choose their preferred tenure and make investments accordingly.
What Is TDS On FD?
TDS is the system of tax deducted at source, which the Income Tax Department implements to collect taxes during specific transactions. In TDS, the payer withholds a certain payment amount and gives it to the government as tax. TDS is deductible from salaries, interest accrued from Fixed Deposits (FDs), professional fees, etc. This is added or deducted from the total tax liability if the payee files a return.
Banks after FD TDS deduction credit interest to your account if the amount exceeds Rs.40,000 for individuals other than senior citizens (in the case of senior citizens, this is Rs. 50,000).
The TDS on the FD rate is 10%. The TDS rate for NRO (Non-Resident Ordinary) FDs is 30%. There is no TDS on NRE and FCNR FDs as they are tax-free. The details of the TDS that the bank deducts are uploaded in form 26AS.
Also, note that TDS is deductible when interest is credited to the bank account and not on maturity. Thus, if you have an FD for three years, banks will deduct TDS at the end of every financial year.
TDS On FD Calculation
Now, we know how much TDS is deducted from FD interest. Next, let’s understand the calculation part and some other important details.
The interest income you receive from a fixed deposit is fully taxable. The interest earnings contribute to the total tax liability. You should also be aware that interest received on an FD within a year gets credited to your annual income. Your tax bracket is calculated according to the total earnings.
Since the interest cash flows received on FD are considered income from other sources, they are under Tax Deducted at Source TDS. TDS on FD is deductible when your bank credits your interest income into the account. Let’s get to know some pointers related to tax on FD:
- The bank does not withhold tax on Fixed Deposits if your yearly income is less than Rs. 2.5 lakh. Nevertheless, certain lenders might require you to file forms 15G or 15H to claim the deductions.
- To avoid additional TDS, deposit Form 15G and 15H to the bank at the beginning of the financial year.
- To avoid TDS deduction, your interest on all FDs should be less than Rs 40,00 in one financial year.
- However, if your interest income is more than Rs. 40,000, the TDS on FD interest would be 10%. Also, if you do not possess a PAN card, the tax deduction by the bank is 20%.
Steps to Calculate TDS on FD Interest
For calculating the TDS amount deductible from the FD interest, follow these steps:
- Determine Interest Income: Determine the total interest earned on your FD for that fiscal year. This data can be obtained from your bank’s interest certificate or passbook.
- Check Eligibility for TDS Exemption: Make sure that your net interest income does not amount to more than the exemption limit, which, as stated above, is Rs.40,000 for individuals below 60 years and Rs. 60,000 for individuals above 60 years. If it does, TDS may be applicable.
- Calculate TDS Amount: If your interest income exceeds the exemption limit, then calculate the TDS amount based on the applicable rate. The formula for TDS calculation is simple: TDS = Interest Income x TDS Rate.
- Consider Additional Deductions: Consider other deductions or exemptions that may be possible, such as Section 80C, 80D and similar. These deductions can lower your taxable income and, hence, the TDS liability.
- Submit Form 15G/15H if Applicable: If you are qualified and want to avoid TDS on FD deduction, fill in Form 15G or 15H to your bank at the start of the financial year.
The Purpose Of Form 15G and Form15H
The Form 15G and Form 15H are self-declaration forms for avoiding TDS deduction. However, Form 15G is for individuals under 60 years, while Form 15H is for senior citizens (above 60 years old). Total income below the taxable limit can be reported using these forms to indicate that no taxes are payable. With these forms, individuals would get an exemption from TDS on FD, RD, and other sources to ensure that they receive the entire amount.
FD TDS Rules
Given below are the significant rules about TDS on FD interest that it is essential to know about:
- The bank will compute your interest income from FDs for the year based on all the FD accounts under the bank.
- The fixed deposit interest income is as per your tax slab rates.
- The people in the highest tax bracket will have to pay taxes over and above TDS.
- The general public should submit Form 15G to enjoy TDS exemption when their income exceeds the taxable limit.
- The TDS exemption form for the senior citizen is Form 15H.
Conclusion
It is important to understand the process of TDS on FD calculation. Investors can also minimise their risk of non-compliance by staying abreast of the latest tax regulations and using applicable exemptions for increased returns. Be sure to get professional advice from a specialist such as Wint Wealth to know more about TDS on FD.
