Is Income Generated From A Fixed Deposit Taxable In India?

As individuals in India seek investment options to grow their wealth and secure their financial future, Fixed Deposits (FDs) are still one of the most trusted investment options. Known to offer stability and guaranteed returns, FDs are a preferred investment avenue for this generation of investors.

As with any investment, taxation comes into play. The question most investors in their 20s and 30s want an answer to is: Are returns generated from FDs taxable in India? Understanding the intricacies of taxation on FD income is essential in ensuring compliance with the country’s tax laws.

This article explores the taxation aspects of income from FDs in India, including the tax rates, exemptions, and other important considerations that individuals should be aware of.

Is FD Income Taxed in India?

Yes, it is. The interest earned as income from an FD  by an investor is taxable. Interest earnings are added to the investor’s total income,  and subsequently taxed as per the tax slab. Investors must declare FD earnings while filing their income tax returns under the Income from Other Sources Category.

From April 2019, if the interest earned on the fixed account exceeds Rs 40,000 per annum, PAN users are liable to pay 10%, and non-Pan users would pay 20% as tax. Investors need to pay taxes before the end of the financial year.

Understand TDS on FD

The Tax Deducted at Source (TDS) will be deducted when your bank deposits the interest in your FD account. If individuals’ interest income, excluding senior citizens, exceeds Rs 40,000, the bank will deduct TDS when crediting the interest earnings to their account. The TDS threshold is higher at Rs 50,000 for senior citizens.

The 10% TDS will be deducted from the interest income of PAN card users by the banks, and it is 20% for non-PAN card users. You can claim this TDS amount while income tax is being filed.

The best way to explain this is by taking the example of Mr. Sharma, who has three FD accounts with different lenders. FD account 1 with Bank X earns an interest income of Rs 60,000 annually. FD account 2 with Bank Y generates Rs 25,000 interest per annum, and FD account 3 with Bank Z gives an interest rate of Rs 18,000 per annum.

Mr. Sharma is thus, liable to pay TDS if the interest earned exceeds Rs 40,000 in a financial year. The tax department does not consider the total interest income of individuals from all banks. TDS only applies to the interest amount that exceeds Rs 40,000 from each bank individually. Mr. Sharma is required to pay a 10% interest rate only on Account 1. Mr. Sharma will get tax exemption on both other accounts.

Ways to Reduce Tax on FD Interest

There are many ways to save TDS on FD interest income. Below are five ways:

1. Submitting Form 15G/15H

If your overall annual income is not more than Rs 2.5 lakh, then the bank will not deduct any TDS on your interest income. For this, you must submit Form 15G (individual) or Form 15H (senior citizen) as proof to claim your TDS amount.

2. Distributing Investments Across Different Banks

Another method is to split your investments across different FD accounts. You can earn interest from different banks. You need to ensure the income does not exceed the limit of Rs 40,000 for each FD account.

3. Timing or Splitting the FD

You can play with time to strategically avoid TDS on the FD account. You can strategically invest your money for a specific period to split your interest income into two financial years. Also, to avoid TDS on FD, split your FD account into an individual’s personal account. The interest income from each account is considered a separate entity, and the earnings of each account will not exceed the TDS limit.

4. Section 80 TTB

Under Section 80TTB, senior citizens (60 & above) get extra tax deduction benefits on their FD interest income. The senior citizen has a TDS exemption limit of Rs 50,000 under this act.

Conclusion

Income from FDs in India is indeed subject to taxation. As an investor, it is crucial to know the tax implications and comply with the applicable regulations to avoid legal issues. The tax rates on FD income vary depending on factors such as the investor’s income slab and the duration of the FD.

It is advisable to consult with a tax professional or financial advisor to understand the specific tax obligations and potential exemptions available. By staying informed and making informed investment decisions, individuals can navigate the tax landscape effectively while maximising their returns.