There are many investment instruments that you can use, like fixed deposits, recurring deposits, etc., which generate interest income that is subjected to tax. It is also mandatory for you to disclose the details of interest income on your income tax return. Income Tax Act, Section 80C allows you to deduct Rs 1.5 lakhs from your taxable income when you invest in a Fixed Deposit to save tax on FD interest. In addition,
it provides a certain amount of interest return and protection for your capital. However, a fixed deposit’s interest income is taxable, and you must pay tax on FD interest. A bank deducts tax at source (TDS) on interest paid on fixed deposits when it exceeds Rs 40,000 for a normal citizen and Rs 50,000 for a senior citizen.
Calculate tax on interest income
When filing your income tax return, you must include your interest income in the total income. It is important to report interest income under the heading “Income from other sources” in ITR. This is because the Income Tax Department will adjust your final tax liability against the TDS (which has already been deducted). Your interest income earned from your fixed deposits should be added to your total income in a particular financial year if the bank does not deduct TDS. To report interest income on your FD, it is not recommended to wait until the maturity date when the interest income was received before declaring it. Due to the accumulated interest, you might pay more tax on FD interest as you move up to a higher tax slab.
Overview of TDS
There are certain payments that you are liable for. In TDS, tax is deducted from the person who is paying you before they make a payment. The tax deducted at the source is called the TDS, which is paid to the central government. Therefore, while reporting your income in your Income Tax return, you will need to add the gross amount to your income. To counter this, the TDS is either credited from the total tax liability or refunded when the tax liability is zero.
Here are some points you should know about TDS on FDs
- The Income Tax Department can refund the amount of tax on FD interest deducted by the bank if you are liable for a lower tax rate.
- You must pay tax on FD interest over the TDS charged as self-assessment tax if you fall into a higher income tax slab rate of 20% or 30%.
TDS is calculated by the banks when the interest is due for the deposit and not when the money is paid. It is, therefore, necessary to pay the tax on FD interest income on an annual basis rather than at the maturity of the FD. However, you can use the FD Calculator if you want to calculate your FD’s maturity amount to reap the tax savings FD benefits.
Ways to save tax on FD interest on Fixed Deposits
- You may use Form 15G/15H if you do not have more than Rs 2.5 lakh in total income for the year. If you do this, you will ensure that your bank will not deduct TDS since your income is not taxable, and you will not be liable to pay any tax.
- It is possible to open your Fixed Deposit in a Post Office branch rather than going to a bank. The post office fixed deposit is not subject to TDS deduction.
- When the right time of the year comes around, you can invest in FD to gain FD benefits. If the FD amount is made closer to the end or middle of the financial year, you can distribute TDS in two years.
- If you wish, you may invest in the name of a family member such as your spouse or parent. Individuals are taxed on fixed deposit interest income based on their fall slab rate.