Understanding Income Tax on Fixed Deposits: A Comprehensive Guide
Fixed deposits (FDs) are a popular savings option in India, known for their safety and assured returns. However, as with any form of investment, the interest earned from fixed deposits is subject to income tax. This article provides a detailed guide on how income tax on fixed deposits is calculated in India, ensuring clarity for both savers and tax professionals.
Interest Income from Fixed Deposits
The interest earned on fixed deposits (FDs) constitutes taxable income. It is added to your total income for the financial year. This interest is calculated based on the principal amount and the tenure of the deposit, as well as the prevailing interest rates applicable at the time of deposit.
Tax Slabs for Fixed Deposit Interest
The tax on interest earned from FDs is determined based on applicable income tax slabs, which vary depending on the total taxable income and the taxation regime chosen: the old or the new tax regime under the Income Tax Act, 1961.
Tax Deduction at Source (TDS)
If your interest income from FDs exceeds certain thresholds, the bank is required to deduct TDS before crediting the interest to your account. For individuals, if the interest exceeds 40,000 Indian Rupees (or 50,000 for senior citizens), a TDS of 10% is deducted. If no PAN details are provided, the TDS rate is higher at 20% or 40%, depending on the individual's tax type.
Importance of Filing Income Tax Returns
Even if TDS is deducted, it is crucial to file your income tax returns to account for the total interest income. If your total income is below the taxable limit, you can claim a refund of the TDS that has been deducted.
Exemptions and Additional Deductions
While there are no specific exemptions for interest earned from fixed deposits, you can claim deductions under Section 80TTA if the interest earned is from a savings account. However, this section does not apply to interest earned from fixed deposits.
Example Calculation
Let's consider an example to understand the calculation better.
Example Scenario
FD Amount: 1,000,000 INR
Interest Rate: 6%
Interest Earned in a Year: 60,000 INR
Assuming your total income including FD interest is within your tax slab, you would be taxed accordingly.
Previous TDS Calculation Rules
It's important to note that previously, TDS was calculated not on the aggregate interest from all FDs but only on the interest from FDs held in a single branch. However, the rules have now been updated, and TDS is calculated based on the aggregate interest income from all branches in the same bank.
Whether you're an individual looking to save through FDs or a business considering these as part of your investment strategy, understanding the tax implications is crucial. By keeping track of TDS deducted, you can ensure that your final tax liability is accurately calculated and reported.