Taxation on Fixed Deposit Interest Explained

The interest earned on Fixed Deposit is taxable as per the Income Tax Act, 1961. However, there's a gap when it comes to understanding how FD interest is taxed in India and how investors can save on their FD tax outgo.

In this article, we have simplified how taxation on fixed deposit interest works. This will help you understand how much of interest are you actually earning via your FD investments. 

How is FD Interest Tax Levied?

Interest income from fixed deposits is fully taxable and should be reported under the head 'Income from Other Sources' in your Income Tax Return. Regarding the taxation on fixed deposit interest, banks deduct tax at source (TDS) at the time of crediting interest to your account if the amount of interest exceeds ₹40,000 for regular depositors and ₹50,000 for senior citizens. The minimum TDS applicable on FD interest is 10%. 

It is important to note that the FD interest tax is deducted at the time of credit and not when the FD matures. 

Understanding Taxation on Fixed Deposit Interest

TDS or Tax Deducted at Source is a taxation mechanism through which tax is deducted from certain payments made to individuals. In the case of fixed deposits, the taxation on fixed deposit interest involves banks deducting TDS at a rate of 10% if the interest income exceeds ₹40,000 (₹50,000 for senior citizens). 

For example, if you earn an FD interest of ₹50,000, the bank would deduct an FD interest tax of ₹5,000 and deposit it to the government. When filing your Income Tax Return, it is necessary to report the entire interest earned and claim the TDS deducted as a refund. 

For a better understanding, here is a table of the threshold limits for TDS deduction. 

It is important to note that if your total income is less than ₹2.5 lakh, no TDS will be deducted. To avoid TDS on your FD interest in case you don't fall under the minimum tax bracket, you can submit Form 15G or 15H to the bank to claim interest income without TDS. 

How to Calculate FD Interest Tax on Interest Income

To calculate taxation on fixed deposit interest, add the interest earnings from your FDs to your total income and determine your FD interest tax liability based on the applicable slab rates. The bank's TDS is adjusted against your final FD tax liability. 

When is Tax on Interest Income Payable?

If there is a tax liability on adding interest income to your total income, it must be paid while filing your income tax return for the financial year. However, if the FD tax payable after including your interest income exceeds ₹10,000, you are liable to pay advance tax in quarterly instalments.

It's important not to wait until maturity to report your interest income, as the taxation on fixed deposit interest can result in accumulated interest pushing you into a higher tax bracket, leading to higher tax payments. 

How to Ensure Zero TDS Deduction by the Bank 

To ensure no TDS is deducted, you can submit Form 15G or 15H to the bank at the beginning of each financial year if your total income is not subject to tax. This exempts you from TDS deduction on interest income. 

FD Interest Tax for Senior Citizens 

Senior citizens receiving interest income from FDs can avail of income tax deductions up to ₹50,000 per year. If their interest income from all FDs with a bank is less than ₹50,000 in a year, the bank cannot deduct any TDS. To know more about this, read this blog.