Fixed Deposits and Income Tax

Fixed Deposit

A Fixed Deposit is an investment instrument that enables people to save money and generate returns. There is a varied range of fixed deposit schemes that are offered by banks and companies in the country. How does a Fixed Deposit work? A Fixed Deposit accountholder lends his/her chosen bank, a certain amount in lumpsum or every month as a recurring deposit.. The bank pays the depositor an interest at a pre-decided rate on the amount deposited by him/her either on maturity or every month.

Lock in Fixed Deposit account refer to FDs that guarantee a higher capital growth as a result of the higher interest rates offered on them. The Reserve Bank of India (RBI) offer banks the right to offer higher rates of interest to customers who have opted for a lock in Fixed Deposit.

Income Tax

Income Tax implies to the tax, levied by the government, on the annual income of businesses as well as individuals. They are liable to pay income tax on their annual income, as per the tax slab decided by the government for that financial year. Interest accumulated on Fixed Deposits is accounted as income and, hence, is taxable. However, Section 80C of the Income Tax Act, 1961 mention certain exceptions related to Fixed Deposits, and other types of investments. Interest accrued on a Fixed Deposit account is exempted from taxation until a certain limit, post which it is chargeable as per the Income Tax Act, 1961.

Tax Exemption on Fixed Deposits

All Fixed Deposits do not attract tax exemptions. There are specific FDs that offer the tax benefit. Such tax saving Fixed Deposits are different from normal FDs.

A normal FD offers depositors the flexibility to choose the investment period, as per his/her preference. It also enables him/her to withdraw the capital within a week from the date of opening. These FDs are not eligible for tax deductions. In contrast, the investor of a tax saver deposit does not allow him/her to withdraw the invested amount before a minimum period of 5 years. However, the investor can avail tax deduction as per Section 80C of the Income Tax Act 1961, on the investment amount up to the specified limits, though the interest earned on this FD will remain taxable.

Tax exemption can be defined as the amount that a business or individual is excused from paying from their annual taxable income to the government, as per single or multiple tax laws, on certain investments and government schemes. According to the provisions announced by the Finance Ministry in 2006, a deposit made towards a tax saving Fixed Deposit is eligible for tax deduction, according to Section 80C of the Income Tax Act 1961, provided it meets the following criteria:

The maturity term is a minimum of 5 years, and can extend up to 10 years, as it varies between banks.
Minimum deposit amount has to be a minimum of Rs. 100, and in multiples of Rs. 100 for further investments.
Maximum amount that can be deposited annually is Rs. 1.5 lakh.
Only individuals and Hindu Undivided Families (HUFs) are eligible for tax exemption.
Premature withdrawal is not applicable on tax saving FDs.
For interest over Rs. 40,000 earned on the deposited amount in a year, TDS will be payable at the end of the financial year. An individual as well as joint names are eligible for opting for a tax saving Fixed Deposit. In case of FDs made by joint accountholders, only one of the holders will be eligible for claiming tax deduction as per Section 80C of the Income Tax Act, 1961.

Benefits of Investing in a Tax Saving Fixed Deposit

A tax saving Fixed Deposit offers the benefit of deducting your investment amount from your taxable income as per Section 80C of the Income Tax Act, 1961.

The same cannot be said about regular Fixed Deposits. These FDs enable you to save from your monthly income, but do not qualify for tax exemptions.

Understanding TDS for Fixed Deposits

Nil TDS deduction: When the interest income on the amount invested towards a bank FD is less than Rs. 40,000 in a year, the concerned bank cannot deduct TDS (Tax Deduction at Source).

TDS Deduction at 10%: The concerned bank deducts TDS at 10% when your annual interest income is more than Rs. 40,000, as per Budget 2019-2020. This amount is an increase from the interest income of Rs. 10,000, which was applicable as per the previous budget. This amount is inclusive of multiple FDs that an individual or business may hold.

TDS Deduction at 20%: For individuals or businesses who have not submitted their PAN number to the bank where they have started a tax saving FD, a TDS deduction at 20% will become applicable.

Annual income does not exceed Rs. 2.5 lakh: When the total annual income is less than Rs. 2.5 lakh, TDS is not deductible. Even for depositors with an interest income of at least or more than Rs. 40,000, an annual income of less than Rs. 2.5 lakh will prevent them from eligible from availing TDS deductions.

This is because when the individual does not become eligible to pay taxes on his/her annual income, TDS cannot be deducted by the bank. To make sure that the bank does not deduct TDS, the depositor has to submit Form 15G or Form 15H as applicable to the bank as a proof of his/her annual income being less than Rs. 2.5 lakh. This will prevent him/her from undergoing the hassle of TDS being deducted and subsequently getting it refunded by the Income Tax Department.

Interest from FD for Senior Citizens

Senior Citizens also can avail the same benefits from tax saving Fixed Deposits that is applicable for all other citizens of India below the age of 60 years. This includes the purpose of deducting your investment amount from your taxable income, as per Section 80C of the Income Tax Act, 1961.

On the other hand, tax savings are not applicable on normal FDs. They offer the sole benefit of offering financial savings from monthly income.

How to Calculate Tax on Interest Income?

Individuals and businesses have to add their interest income to their total annual income while filing their Income Tax Return. This holds true even if it does not exceed the annual income limit of Rs. 2.5 lakh that is mandatory for being eligible for TDS deductions. If the annual income, which includes the interest income from a Fixed Deposit, does not exceed Rs. 2.5 lakh, it is recommended that the FD accountholder submit Form 15G or Form 15H as applicable to prevent the bank from deducting TDS and getting it refunded later while adjusting the final tax liability.

In case the individual decides to opt for tax calculations after the FD account reaches maturity and he/she has received the accrued interest, the total interest income may cross the threshold of non-taxability. In that case, the individual will end up paying a higher tax amount. A higher interest income will automatically attract higher taxes. Form 26AS offers a detailed breakup of TDS deductions made.

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FAQs on Fixed Deposits and Income Tax

What exactly is tax exemption?

Tax exemption can be defined as the amount that a business or individual is excused from paying from their annual income to the government, as per single or multiple tax laws, on certain investments and government schemes.

Are Fixed Deposits valid for Tax Exemption?

Only tax saving Fixed Deposits, which have a fixed term of 5 years, attract tax exemptions on the invested amount. Tax exemptions are not applicable for regular FDs. However, interest income generated by Fixed Deposits is taxable as per Section 80C of the Income Tax Act, 1961.

Are fixed deposits taxable?

How much interest can I earn without paying tax?

The interest that you can earn without paying taxes depends on the type of investment you have opted for. The maximum annual limit is Rs. 40,000 as per the announcement made in budget 2018-19.

Is FD covered under 80C?

Not all Fixed Deposits are covered under Section 80C of the Income Tax Act, 1961. Fixed Deposits are classified under two categories – regular Fixed Deposits and tax saving Fixed Deposits. Regular Fixed Deposits offer only the benefit of saving from the monthly income, while tax saving Fixed Deposits serves the dual purpose of savings from annual income along with tax benefits.

Is FD maturity amount taxable?

No, the Interest amount of a Fixed Deposit is taxable.

Is interest on 5 year FD taxable?

Interest income on a 5-year FD, also referred to as a tax saving FD, is taxable under Section 80C of the Income Tax Act, 1961.