written by | May 16, 2022

How to Pay Income Tax on Fixed Deposit Interest Income?

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Opening a fixed deposit (FD) account is among the most effective investments you can make. In addition to creating the potential for a fund for the future, it could save taxes. Let's find out how much tax-deductible amount you could save with your FD accounts. Fixed deposits are a safe investment option in India. It is possible to open a fixed deposit with the name of an adult, minor, or senior citizen, and the deposit aids in building up a substantial amount of savings. 

In comparison to savings, fixed deposit accounts have a better interest rate. Additionally, the account allows you to take advantage of the short-term loan in emergency financial situations.

Most often, people invest in reducing tax burdens. If you want to open your FD account to get tax deductions, read on to learn ways to save money from FD earnings.

Did you know?

If you're in a lower tax bracket, but your bank has still deducted TDS, you can claim the deduction by filing your income tax return. If you fall under higher income tax slab rates (nearly 20-30%), paying self-assessment tax will be necessary over TDS.  

What Is a Fixed Deposit and How Does It Operate? 

A fixed deposit account holder loans their preferred bank a specified amount in a lump sum or a recurring instalment each month. A bank will pay the depositor interest rate at a fixed rate on the amount of money a person has deposited at the maturity date or each month. The fixed deposit lock is FDs that promise a greater capital growth rate due to the higher rates. The Reserve Bank of India (RBI) gives banks the option to provide more interest rates to those who have chosen to lock their fixed deposit.

Income tax describes the tax the government imposes on the yearly earnings of companies and individuals. They must pay tax on their yearly earnings according to the tax slab set by government officials for the financial year. Also, the interest earned on fixed deposits is counted as income, and consequently, it is tax-deductible. But, the Income Tax Act 1961 section 80C provides a few exceptions to these deposits and some other kinds of investments. The interest earned in fixed deposit accounts is tax-free until the limit is reached, after which it will be taxed according to the Income Tax Act 1961. 

Also Read: How Do You Calculate Taxes on Income Generated From Share Sales?

How to Calculate Tax on Fixed Deposit?

When making the income tax return, businesses and private individuals have to include their interest income in their annual income. This applies regardless of whether it exceeds the annual maximum of ₹2.5 lakhs, which is the minimum requirement to qualify for TDS deductions. 

What if the income per year, including the interest earned from fixed deposits, does not exceed the sum of ₹2.5 lakhs? We recommend the FD account holder file form 15G or 15H, depending on the circumstances. This will prevent the bank from making deductions of TDS and then reclaiming it in the future after changing the tax liability to the last.

Tax Exemption for Fixed Deposits

FDs of all kinds do not have tax advantages. There are some FDs that provide tax benefits. These tax-saving FDs differ from ordinary FDs. A typical FD gives depositors the freedom to pick their investment time depending on their preferences. The FD also allows depositors to take the money within a week of the opening date.

They do not qualify to be tax-deductible. However, the owner of an account cannot take the money out before the expiration of a minimum time of five years. Also, an investor can take advantage of tax deductions according to section 80C in the Income Tax Act 1961 on the amount invested as much as the limits specified; however, the interest you earn from the FD is tax-deductible.

As per the guidelines from the Ministry of Finance in the year 2006, the deposit in tax-saving FDs can be tax-deductible under section 80C under the Income Tax Act of 1961, in case you meet these requirements:

  • The maturity period is at least five years. It's possible to extend it by as many as 10 years because it differs between banks.
  • The minimal deposit amount should be at least ₹100 and multiples of ₹100.
  • The highest amount you can deposit each year is ₹1.5 lakhs.
  • Hindu Undivided Families (HUFs) and Individuals can opt for it for tax-free status.
  • The withdrawal of funds before maturity isn't possible for tax-saving FDs.
  • If interest is greater than ₹4,000 that is earned on the amount you deposit within a calendar time, TDS are due by the close of the fiscal year. Individuals and joint names can opt for a tax-saving FD. If joint account holders create FDs, each owner can claim tax deductions under section 80C of the Income Tax Act of 1961.

Fixed Deposit Tax Benefits

Below are the strategies for obtaining income tax benefits and avoiding TDS on FDs are below:

Make a Bet on a Tax-Saving Fixed Deposit

Tax-saving FDs allow you to make a deposit and receive a tax deduction as per section 80C. What if you choose to go with the tax system in place before? In tax-saving FDs, you can claim the tax benefits when you contribute up to ₹1.5 lakhs during a financial year by taking part in tax-saving under section 80C of the Income Tax Act. 

You Can Apply for a Loan on FD

Most people get loans from various lenders when they're in an economic crisis, and the option of borrowing from FDs by banks is among the alternatives. It is a quick and easy method of getting a loan for a short time. Instead of having to withdraw the funds from their FD, depositors can request a loan against their FD. An FD loan is a type of secured loan, and the depositor pledges their fixed account as collateral for a loan. The deposit size determines the loan balance, and it could be anywhere between 90-95% deposit. 

Depending on the account holder's choice, we can store tax-saving FDs in one or joint accounts. However, if it's a joint account, the tax benefits will only be available to the account holder who is the first to open it. Whether they are individuals or have joint accounts, all FD holders are eligible for loans against those accounts. 

This type of loan doesn't apply to those with a tax-saving FD with a five-year term. Banks use their customer's FD to secure the loan when they grant loans against the FD. In the end, there's a guarantee of a loan. Because the loan is secured, its interest is very low. If the lender cannot pay back the loan, the bank will be able to recuperate the funds in the FD swiftly. 

The loan amount calculation typically takes place at the time of maturity.

Also Read: How Are Gifts Taxed in India?

Invest in the Post Office FD

Instead of visiting an institution, create an instalment deposit at a post office branch. If you've deposited as 5-year term deposits, the depositor can receive up to ₹1,50,000 rupees tax-free as per section 80C under the Income Tax Act, 1961. Post office FDs are higher than those in the market. The current interest rate ranges from 5.5% to 6.7%, depending on tenure. It may range between 1 to 5 years.

Conclusion

The fixed deposit (FD) is a tool for investment that allows people to make savings and earn profits. There are various fixed deposit options for companies and banks across India. This article contains the key tax rules about FDs. It is vital to know these principles before investing in FD to avoid penalties that might occur soon. 
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FAQs

Q: How much FD interest is tax-free?

Ans:

Post offices or banks deduct TDS when the aggregate interest income exceeds ₹40,000 per FY on all FDs. In the case of senior citizens, The limit is ₹50,000.

Q: How much is the income tax on fixed deposits?

Ans:

Interest on FD is taxable, and it depends on various IT slabs.

Q: What is the fixed deposit tax benefit?

Ans:

A tax-saving FD account is a sort of account that provides a tax deduction. You can claim a maximum of ₹1.5 lakhs per annum deduction by investing in a tax-saving FD account.

Q: What is TDS on fixed deposit?

Ans:

It is 10% when the interest amount for the whole financial year exceeds ₹10,000

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.