Is Fixed Deposit Interest taxable in India

There is some confusion on whether the interest on FD is taxable or not? Remember, the fixed deposit investment is a safe investment, especially if it is with the banks. However, on the tax side, they are treated as regular income and hence taxed at the peak rate applicable. The taxes on fixed deposit have to be understood at 3 levels.

1. First is the taxation on FD interest.
2. Second is the TDS on interest on fixed deposits.
3. Third is the exemptions available on FD investments and on FD interest.

The primary thing to understand here is that fixed deposit interest is taxable. You will pay tax depending on which slab you fall into. However, the only way you don’t pay tax on fixed deposit interest is when your total income including the interest earned for the fiscal year is less than Rs2.50 lakhs. Otherwise, it is a taxable income.

Tax treatment of interest earned on fixed deposits?

As stated earlier, the interest income earned on Fixed Deposits is fully taxable in the hands of the recipient. This interest income on fixed deposits will be added to your total income and get taxed at slab rates applicable to your total income. Interest on FD is reported under Income from other sources. If you are in the 10% tax bracket, the tax payable on FD interest is 10% and if you are in the 30% tax bracket, then you pay tax on the FD interest at 30%.

This is base rate and any cess or surcharge if applicable will be over and above that. Do you have to show it in your income tax statement, even if the amount is very small? Yes, in fact, you should first cross verify your total interest income with the AIS available in the tax portal before filing your returns.

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Understanding TDS on interest on FD

Today, most income pay-outs require the payer to deduct TDS at the applicable rate. In the case of interest on FD, the bank will deduct TDS while crediting the interest to your account. The bank will deduct TDS (tax deduction at source) only if the amount of interest is beyond Rs40,000 for individuals. Remember, this is tracked through your PAN, so this includes your total interest income from all bank accounts including savings account, FD account and post office accounts. The exemption limit is higher in the case of senior citizens (above 65 years) where the TDS exemption limit is interest of Rs50,000 per financial year.

There is an interesting point to note here. The interest is taxed based on accrual of interest and not on the basis of payment. Hence, if you have a cumulative FD that is paying interest at the end of 3 years, you still need to show the accrued interest income each year, even though you receive the cumulative interest only at the end of the terms. The difference between cumulative and non-cumulative fixed deposits is that the latter pay interest at regular intervals, based on the base principal.

If TDS is deducted, do I still need to pay tax?

Don’t get confused between the TDS and tax payable. TDS is just a part of the tax payable which the government takes away to keep an audit trail of receipts and payments. TDS is normally deducted on the interest on FD only at 10%. However, you may be in the 30% tax bracket. Hence, when you file tax returns, you get credit for the TDS that is already deducted and you need to pay balance 20% tax. Alternatively, if you are not liable to pay tax on interest, you can claim refund of TDS while filing your returns.

There is a very small thing you need to keep in mind. When you do an FD and the bank deducts TDS on interest, you must submit a copy of your PAN card copy to the bank. Normally, if the PAN card is not submitted, the bank will deduct TDS at 20% instead of the normal 10%. When you report interest income in the returns, report the gross income. For instance, if you earn Rs18,000 as interest and the bank has already deducted Rs1,800 as TDS, you need to show Rs18,000 as your total interest income and not Rs16,200. The Rs1,800 can be claimed as TDS credit while calculating actual tax liability.

Do you need to pay advance tax on interest income also?

There are two important things you must remember here. Firstly, any liability of tax on interest income has to be paid before March 31st each fiscal year. Any payment of tax after that date attracts penalty. July 31st is the last date for filing returns, but your tax payments should have been fully completed by 31st March. The second issue is about advance tax. The extant rule is that if your tax liability after adding interest income to your total income crosses Rs10,000, then advance tax has to be paid on a quarterly basis, as per the schedule of advance tax payments outlined by CBDT.

How Budget 2019 modified the TDS rules on bank interest

Prior to Budget 2019, the limit for TDS on interest income was Rs10,000 and if the annual interest was more than Rs10,000 then TDS would be applicable. However, Budget 2019 decided to reduce the paperwork by raising this limit to Rs40,000 per year for regular account holders and Rs50,000 per year for senior citizens. This reduces the amount of paper work and the wait for refunds.

As stated earlier, the rate of TDS is 10%, but that is only if the PAN related details are already submitted by the account holder to the bank. In case these details are not yet submitted to the bank, it deduct tax at 20%. Also, in the case of NRIs (NRO resident) account, the tax is deducted at 30% plus cess in all the cases.

When to file form 15G and Form 15H with the bank?

The extant rule post the Budget 2019 is that no TDS needs to be deducted on interest if the annual interest earning is less than Rs40,000 for those who are not senior citizens. However, there could be cases wherein investors may earn more than Rs40,000 interest in a year, but total Income (including interest income) may be less than Rs2.50 lakhs; the basic income tax exempt limit. In such cases, why should you go through hassle of claiming refund. Instead, submit a signed Form 15G to the bank mentioning that your total income is under the taxable limit. The bank will not deduct TDS on interest.

Similarly, there are senior citizens who earn more than Rs50,000 interest in a year, but total Income (including interest income) is less than Rs2.50 lakhs which is the basic tax exempt limit for income. Again, senior citizens have to claim refund, which is a time consuming process. Instead, Form 15H (separate form for senior citizens) can be filed with the bank, in which case no TDS would be deducted for the senior citizen.

There is a small difference in tax treatment. For senior citizens, interest income on bank and PO deposits is exempt from tax under Section TTB, specially introduced as per the Finance Bill 2018. For others, interest income is full taxable at the extant rates.

Section 80C benefits on long term fixed deposits

Long term FDs give additional exemption under Section 80C of the Income Tax Act up to Rs1.50 lakh per fiscal year as deduction from total income. However, the interest income earned on the fixed deposit is taxable. These long term deposits, to be eligible for Section 80C benefit will be subject to mandatory 5-year lock in. You cannot raise loans against such FDs.