Fixed Deposits (FDs) are a popular savings tool in India, offering assured returns over a fixed tenor. However, understanding the tax implications, especially Tax Deducted at Source (TDS) on FD interest, is crucial for investors.
What is TDS?
TDS is a mechanism introduced by the Income Tax Department under the Income Tax Act, 1961, to collect tax at the source of income. TDS ensures that tax is deducted before the income is credited to the investor’s account, thereby minimising tax evasion. For FD investments, TDS is deducted by the bank or NBFC issuing the FD on the interest earned.
When is TDS Deducted on FD Interest?
TDS on Fixed Deposit interest is deducted when the interest income exceeds a specified threshold in a financial year. As of the current tax laws, the threshold is ₹40,000 for general investors and ₹50,000 for senior citizens. If the interest earned in a financial year surpasses these limits, TDS will be deducted at the applicable rate.
TDS Rates on FD:
The TDS rates on FD interest depend on the investor’s tax residency status:
- Residents: For resident Indians, TDS is deducted at a rate of 10% if the interest income exceeds the threshold. However, if the investor has not provided their Permanent Account Number (PAN) to the bank or NBFC, TDS is deducted at 20%.
- Non-Residents: For Non-Resident Indians (NRIs), TDS is deducted at 30%, plus applicable surcharge and cess, irrespective of the interest amount.
Consider an individual who earns ₹50,000 as interest from an FD in a financial year. If the investor has provided their PAN, the issuer will deduct TDS at 10%, i.e., ₹5,000. Therefore, the net interest credited to the investor’s account will be ₹45,000.
How to Calculate TDS on FD Interest
To determine TDS on FD interest, follow these steps:
- Determine the Total Interest Earned: Sum up the interest earned from all FDs held with a bank or NBFC in a financial year.
- Apply the Threshold Limit: Check if the total interest exceeds the threshold limit of ₹40,000 (₹50,000 for senior citizens).
- Calculate TDS: If the total interest exceeds the threshold, calculate 10% of the total interest as TDS.
Form 15G and Form 15H
Investors can avoid TDS deduction by submitting Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) if their total income is below the taxable limit. These forms declare that the investor’s total income is below the exemption limit, and therefore, no TDS should be deducted on the interest income.
How to Claim TDS Refund
If TDS has been deducted on your FD interest but your total income is below the taxable limit, you can claim a refund by filing your Income Tax Return (ITR). The process involves the following steps:
- Collect TDS Certificates: Obtain Form 16A from the bank or NBFC, which details the TDS deducted on your interest income.
- File Your ITR: Declare the total interest income and the TDS deducted in your ITR. If your total income is below the taxable limit, the Income Tax Department will refund the TDS amount.
Reporting FD Interest in Your ITR
It is mandatory to report all your interest income, including FD interest, in your ITR. Here’s how to do it:
- Identify the Total Interest Earned: Sum up the interest earned from all your FDs.
- Report Under ‘Income from Other Sources’: Include the total interest income under the ‘Income from Other Sources’ section in your ITR.
- Claim TDS Credit: Mention the TDS deducted under the ‘TDS’ section to claim credit for the tax already paid.
Impact of TDS on FD Returns
While TDS reduces the immediate interest income credited to your account, it does not impact the overall returns on your FD investment. TDS is merely a tax collected in advance, and if your total income falls below the taxable limit, you can claim a refund. Therefore, it’s essential to consider TDS as a part of your tax planning strategy.
Important Points to Remember
- Threshold Limits: Always keep track of the threshold limits for TDS deduction to plan your FD investments efficiently.
- PAN Submission: Ensure you have submitted your PAN to the bank or NBFC to avoid a higher TDS rate of 20%.
- Form 15G/15H: If eligible, submit Form 15G or 15H at the beginning of the financial year to prevent TDS deduction.
- TDS Certificates: Collect Form 16A from your bank or NBFC for accurate reporting and to claim refunds if applicable.
- Regular Review: Periodically review your interest income and TDS deductions to ensure proper compliance and to avoid any last-minute surprises during tax filing.
Understanding TDS on FD interest is crucial for effective tax planning and maximising your returns. By being aware of the applicable TDS rates, threshold limits, and ways to avoid or claim TDS refunds, you can ensure that your FD investment remains a lucrative and tax-efficient savings tool. Always stay informed about the latest tax provisions and consult a tax advisor if needed to navigate the complexities of TDS on FD interest.
