A fixed deposit gives a fixed interest rate and a fixed date when it ends. The money you get back is easy to predict. What is not easy to predict for people who put money in a fixed deposit is how the taxes will affect the real amount they get.
Where the interest income is reported
The interest from a fixed deposit is reported under the category “Income from Other Sources” when someone files their income tax return. It does not matter if the interest was taken as cash put into a savings account or used to make another fixed deposit. The interest is taxed even if it was not taken out.
The interest can be seen in places. Bank statements show the amount that was added. Form 26AS and the Annual Information Statement show the interest that the bank reported and the TDS that was taken if any.
The TDS system
Banks take TDS at 10% when the interest from a bank is more than the limit in a financial year. The limit is ₹50,000 for people who’re not senior citizens and ₹1 lakh for those who are.
The limit is per bank not per fixed deposit. If a person has three fixed deposits with the bank the total interest from all three is added together to see if TDS applies. If the total is than ₹50,000 TDS is taken on all the interest, not just the part that is over the limit.
If a person does not give their PAN to the bank the TDS rate goes up to 20%.
TDS is not the amount of tax. It is like a payment made in advance. When the tax return is filed it is adjusted against the tax. If the actual tax is less than the TDS the extra is returned. If the actual tax is more the remaining amount is paid.
How the tax rate affects the return
The rate that is shown on a fixed deposit is not the rate that the person actually keeps. The tax takes some of it away.
A 5-year fixed deposit at 6.40% gives a return of 4.64% after tax for someone in the 30% tax bracket. The tax reduces the return by two percentage points.
At the rate someone in the 20% bracket keeps about 5.12% and someone in the 5% bracket keeps about 6.08%. The fixed deposit rate is the same. The tax rate decides what the person ends up with.
An example helps to see the difference. A deposit of ₹5 lakh in a 5-year fixed deposit at 6.40% grows to about ₹6,86,822 at the end including ₹1,86,822 in interest before tax. For someone in the 30% bracket the interest after tax is about ₹1,29,718. The total is about ₹6,29,718. The tax cuts the value by ₹57,104.
The deduction for citizens under Section 80TTB
Senior citizens who live in the country can get a deduction of up to ₹50,000 on the interest from deposits under Section 80TTB. The deduction applies to interest from savings accounts, fixed deposits and recurring deposits.
The deduction is only available under the tax system. Senior citizens who choose the system cannot get it.
The deduction is limited to the interest earned. If a senior citizen earns ₹40,000 in interest the deduction is ₹40,000 not ₹50,000. The maximum is ₹50,000. It is not guaranteed.
The deduction for the principal under Section 80C
Under the tax system the amount of money put into a 5-year tax-saving fixed deposit can be deducted under Section 80C up to the overall limit of ₹1.5 lakh.
The 5-year tax-saving fixed deposit is different from a fixed deposit. It has a lock-in period. The money cannot be taken out early. The interest is taxed at the persons tax rate like a regular fixed deposit.
How to avoid TDS if income is below the level
If the total income is below the level that is taxed the person can give the bank Form 15G or Form 15H asking that no TDS be taken.
Form 15H is for citizens. Form 15G is for people under 60. These forms are valid for one year and must be given at the start of the year. If they are not given and TDS is taken the person can get the money back when they file their return.
What retail investors should remember
Interest from a fixed deposit is taxed at the tax rate that applies to the person. The real return is less than the rate that is shown for anyone in the 20% or 30% tax bracket. The difference is not small. It can reduce the value of a ₹5 lakh deposit by than ₹57,000 over five years.
TDS is a way to collect tax, not the amount. The real tax depends on the income. People who earn more than the limit should check Form 26AS and the Annual Information Statement to see the TDS that the bank reported and match it with their tax when they file.
Senior citizens have an advantage under the old tax system. The deduction of up to ₹50,000 under Section 80TTB reduces the tax on fixed deposit interest and the higher TDS limit of ₹1 lakh delays the tax. For a citizen with a moderate interest income the tax on fixed deposits can be much lower than for a regular person in the same tax bracket.
FAQs
1. What is the TDS limit on fixed deposit interest?
Banks take TDS at 10% if the interest from a bank is more than ₹50,000 in a financial year for people who are not senior citizens or ₹1 lakh for people who are. If the person does not provide their PAN, the TDS rate is 20%.
2. Is TDS the tax on fixed deposit interest?
No. TDS is like an advance payment of tax. The final amount depends on the income and the tax rate. If TDS is more than the tax the extra is returned. If it is less the person pays the difference.
3. Can senior citizens get a deduction on interest from fixed deposits?
Yes. Senior citizens who live in the country can get a deduction of up to ₹50,000 on interest from deposits under Section 80TTB. The deduction is only available under the tax system.
4. How can I stop TDS on fixed deposit interest if my income is below the level?
By giving the bank Form 15G (for people under 60) or Form 15H (for senior citizens). These forms say that the total income is below the level and the bank will not take TDS. The forms are valid, for one year.
