Do you feel good when there is a tax deduction on the interest amount you earned from your Fixed Deposit (FD) investment? The interest income you earn is fully taxable as it is considered 'Income from Other Sources’ under the Income Tax Act, 1961.
Here is an article that explains how the interest earned on an FD is taxed.
Introduction to Fixed Deposit
A fixed deposit is a widely used savings and investment instrument offered by financial institutions that provides a predetermined rate of interest for a fixed tenure without being directly affected by market fluctuations.
Tax on a Fixed Deposit Interest
TDS (Tax Deducted at Source) is a tax deducted on the accrued interest amount of an FD. The deduction is not calculated on a single fixed deposit but on the accumulated interest amount across multiple fixed deposits that you hold as an investment with the respective financial institution.
TDS is deducted on fixed deposit interest when the total interest earned across all deposits exceeds ₹5,000 in a financial year. The standard rate is 10% on the amount above this threshold. Eligible resident individuals and senior citizens can submit Form 15G or 15H to declare income below taxable limits and avoid TDS deduction. For example, if total FD interest across all deposits exceeds ₹5,000 annually, TDS at 10% applies to the excess.
Important: For cumulative FDs where interest is paid only at maturity, TDS is still deducted at the end of each financial year on interest accrued during that year — not at maturity. Likewise, depositors must declare accrued FD interest in their ITR annually on an accrual basis, not only when cash is received.
Basic Regulations of TDS on a Fixed Deposit
To comprehend how TDS works on a fixed deposit, here are a few essentials and guidelines you should know about TDS.
1. Financial institutions deduct TDS on FD interest when credited/paid during the FY if the threshold is exceeded.
2. The standard rate of taxation on an FD is 10% of the interest earned in the fiscal year.
3. If you neglect to provide PAN (Permanent Account Number) Card details linked to your fixed deposit, financial institutions can deduct 20% TDS.
4. The primary account holder is responsible for paying TDS, and the secondary account holder is not liable for TDS deductions if joint account holders hold the FD. However, each joint holder must still declare their proportionate share of FD interest in their individual ITR under ‘Income from Other Sources’ based on beneficial ownership. The secondary holder’s income is not exempt simply because TDS was deducted on the primary holder’s PAN.
TDS Calculation on a Fixed Deposit
The standard TDS rate on a fixed deposit is 10% for resident individuals. To understand the calculation, suppose you have invested in a fixed deposit of ₹2,00,000 and earn an annual interest of ₹20,000.
Since the interest earned exceeds the ₹5,000 threshold applicable to NBFCs, TDS will be deducted at the rate of 10% on the entire interest amount. Note that this threshold applies to the aggregate interest earned across all your deposits with the institution during the financial year.
Resident citizens and senior citizens whose total annual income is below the taxable limit can submit Form 15G or Form 15H, respectively, to request that no tax be deducted at source. For Non-Resident Indians (NRIs), a higher TDS rate of 30% (plus surcharge and cess) typically applies from the first rupee of interest, unless relief is claimed under a relevant Double Taxation Avoidance Agreement (DTAA).
How to Manage TDS on FD Interest
Eligible investors can submit self-declaration forms to their financial institution before interest credit to manage TDS requirements per regulations. Consult a tax advisor or official resources for eligibility and process details.
FAQs
Is a fixed deposit tax-free?
No, interest earned from a fixed deposit is taxable as per the investor’s income tax slab.
How much amount of FD interest is tax-free?
TDS thresholds vary: ₹40,000 for general depositors at banks; ₹50,000 for senior citizens (60+) at banks (Finance Act 2018); ₹5,000 for NBFCs and cooperative societies. All FD interest remains taxable per your income slab, and must be declared in the ITR even where no TDS was deducted.
Is it necessary to show FD interest in ITR?
Yes. FD interest must be declared in the Income Tax Return under “Income from Other Sources.” For cumulative FDs, interest must be declared annually on an accrual basis, not only at maturity.
What happens if I don't show FD interest in ITR?
Investors are responsible for reporting all income as per applicable tax regulations. The Income Tax Department cross-references FD interest data from financial institutions via Form 26AS and AIS. Non-disclosure can result in a tax notice, addition of undeclared income, interest under Sections 234A/B/C, and penalty under Section 270A.