When you make an investment, the interest you earn on your principal corpus becomes liable for taxation. However, the taxation rules vary from one investment instrument to another. In case of FDs, account holders need to pay TDS or Tax Deducted at Source.
The amount of tax on FD interest is deducted by the bank while depositing the interest income to your bank account. However, there are certain situations when individuals can also avail certain tax benefits.
Find complete details pertaining to FD taxation in the following sections.
Income Tax Exemption on FDs
The interest income you earn from Fixed Deposits is completely taxable and is not eligible for any exemption. You need to report such income as “income from other sources” in your IT return.
You bank will deduct tax at source from your interest income while depositing the corpus in your account. However, this is applicable when your income is more than Rs.40,000. For senior citizens the threshold is fixed at Rs.50,000.
Thus, if your interest income from a particular FD account in a financial year is less than Rs.40,000, you will be eligible for a TDS refund.
At the same time, you should remember that tax on FD interest is deduced at the time when interest is credited and not after FD maturity. Thus, if you have a Fixed Deposit of three years, your bank will deduct tax every financial year and not at the end of tenure.
Let us understand this with an example:
Suppose you have a Fixed Deposit account with a bank for a tenure of 3 years. You earned Rs.45,000 as interest during the first year. In this case, your interest income will be eligible for TDS. Since the rate of TDS for FDs is 10%, you will have to pay Rs.4,500 as tax on your FD interest income for the first year.
Now, suppose you have another FD account in another bank which provides you with an interest income of Rs.30,000. In such a situation, your income will not be liable for tax.
Apart from that, you can avail income tax exemption if your annual income is less than Rs.2.5 Lakhs. In such a situation, you can submit Form 15G or 15H (for senior citizens) at the beginning of a financial year. Doing so will ensure banks do not deduct tax at source on your FD interest income.
Tax Benefits through Tax Saving FDs
Apart from general Fixed Deposits, banks and financial institutions also offer tax saving FDs. In such investment instruments, the tax on FD interest is eligible for deductions under Section 80C of the Income Tax Act. According to this act, you can avail a maximum deduction of Rs.1.5 Lakh per financial year.
A few features of tax saving FDs are:
- These FDs feature a lock-in period of 5 years.
- The interest earned on your account is liable for tax
- It does not allow premature withdrawal
However, before investing in tax saving FDs, you should consider an extremely important factor. This section provides deductions for several investment instruments, and the maximum deduction limit for all such investments is capped at Rs.1.5 Lakh. Thus, if you have other interest income exceeding this benchmark, you may not be able to avail deduction on your tax saving FD.
Benefits of Investing in FDs
Fixed Deposits have gained immense momentum in recent years, owing to their ease of availability, risk-free nature and power of compounding. These investment instruments extend the following benefits:
- Assured returns
FDs offer steady returns over a specified period of time. The interest rate on FDs remains constant throughout the tenure, irrespective of market conditions. Thus, you do not need to worry about volatility hampering your investment.
- Ease of access
You can easily invest through FDs if you have a savings account in a bank. You simply need to fill an online form or contact a bank representative regarding the same. The application process is extremely simple and convenient, making it a viable investment option.
- Power of compounding
FDs also benefit from the power of compounding. In simple terms, banks offer Fixed Deposits mostly at compounded interest rates. This means you earn interest on interest, which increases your principal corpus over time. This helps you obtain a substantial corpus over a lengthy period.
Apart from these, you can also earn regular income through FDs. You can contact your bank for monthly or quarterly payouts, which will help you meet your financial obligations with ease.
Owing to such benefits, consider comparing different FD offers through a diversified marketplace like Bajaj MARKTES. You can view different Fixed Deposit options offered by leading banks and financial institutions and apply for the same through this platform.
If you want to start investing through this route, tax on FD interest is one of the critical things to consider. This can help you assess your annual tax outgo and plan your finances accordingly.
Santosh Kumar is a Professional SEO and Blogger, With the help of this blog he is trying to share top 10 lists, facts, entertainment news from India and all around the world.