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When & How to Pay Income Tax on Fixed Deposit Interest Income?

When it comes to investment, fixed deposits are considered as the most prevalent option, especially for senior citizens. Why? Well, because the FD is fixed and cannot be affected by any market forces. Given these obvious reasons, they promise an easy return and no loss of capital.

Not to forget that their steady return also signifies that they’re taxable. Your FD’s income will be added to the other income and would be referred to as “Income from Other Sources.” Just like your other sources of income, your FD income will be taxed at a similar rate.

How is the interest Income Taxed?

Fixed Deposit’s interest income is taxable. Add the interest income to the other sources of income to get the total income. In your ITR, you will find the income that you got from FD is listed under “Income From Other Sources.” The tax will be deducted while crediting the interest to your bank account. Therefore, if your FD is for three years, the bank will deduct the TDS annually.

Understanding TDS: While sending you a certain payment, the bank has to make the tax deduction while paying. The deducted tax comes to be known as the TDS, which is paid by the bank to the Central Government.

How is the Tax Calculated?

The tax liability is obtained by adding the interest income to the total income of a person. Match it with the annual TDS deduction that has been made by your bank. Even if it’s not deducted, you are entitled to pay a tax of your total income along with the interest income. Paying tax yearly is highly recommended as you wouldn’t have to bear the burden of paying a huge amount of tax, at the time of your FD’s maturity.

The Form 26AS contains every detail that concerns TDS deduction. ClearTax will automatically import every TDS entry from the Income Tax Department while filling the Returns. In this way, you won’t miss out on any entries.

Let us take an example to understand this concept more clearly. You fall into a tax bracket of 20%. You have two fixed deposits of 1,00,000 each at an interest of 8% per annum for three years. The first year’s interest income would be 8,000 from both of the Fixed Deposits. Therefore, the total interest would be 16,000 for that year. Considering the interest income, the bank will deduct 10% of TDS, i.e., 800 from each FD.

When to pay the tax?

Usually, a person needs to pay the tax on or before the end of March, i.e., before the financial year ends. If you’ve got a huge income from the interest, you are entitled to pay off the advanced quarterly tax. A great way to reduce your TDS deduction is to link the bank account with a PAN card. Once you link it, you will be getting a 10% TDS deduction.

In addition to that, you also become eligible for a deduction of tax when you have FD rates less than 10,000. In simpler words, the bank will not deduct TDS if the interest income is lower than 10,000. Now, the question arises can people get a TDS deduction who have got more interest income? Definitely yes. For people having an interest income less than 2,50,000, there’s an option for them to provide the 15H and 15G Forms, which will avoid TDS deduction.

However, the recent report suggests otherwise. The Income Tax Act under Section 80TTB of Budget 2018 suggests that senior citizens should have an interest income less than 50,000 to avoid TDS deduction. Therefore, even though FDs are taxable, they prove to be a steady source of income.

Understanding the relation between TDS and FDs

  • If you consider the recent development in the Budget 2019, it says that you can’t get a TDS deduction if the overall interest income is lower than 40,000 annually.
  • Annually, the bank generates an estimation of the interest income for every FD you’ve with that particular bank. If your total interest income is more than 40,000, you will be provided with a TDS deduction of 10%.
  • You will receive a greater TDS deduction of 20% on your interest income if you cannot provide your PAN card.
  • There lies only one way to ensure there’s no TDS deduction, i.e., by submitting the 15H and 15G Form.

CONCLUSION

Fixed Deposits lets you completely exploit the advantages offered by Section 80C. You will become eligible to get a deduction from the taxable income up to 1.5 lakh. With FDs, you will be assured interest returns as well as capital protection.

We hope this guide has been beneficial for you. Now that you know how the income tax scenario on your Fixed Deposit works, we wish you the best of everything! Do proper research and invest your money accordingly.

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