Interest earned from Fixed Deposits (FDs) represents taxable income, subject to tax deductions. Whether the FD is held with a bank, post office, or NBFC, institutions deduct TDS in line with government-set income tax regulations.
Summary 1. The tax is levied solely on the interest amount and not on the principal amount, a crucial distinction to bear in mind. 2. According to Section 194A of the Income Tax Act, tax must be deducted when the interest is credited or paid to the account holder. 3. In cases of joint account holders, the deduction of fixed deposit TDS occurs based on the PAN information of the primary account holder.
TDS on Fixed Deposits
As the financial year approaches its end, many investors rush to make final investments, often turning to popular tools like Fixed Deposits (FDs) offered by both public and private sector banks, along with NBFCs, due to their attractive interest rates. Despite being seen as a low-risk, high-return option, it’s crucial to remember that tax is imposed solely on the interest accrued, not on the principal amount.
Tax Deducted at Source (TDS) is applied to the interest earned from Fixed Deposits (FDs) as it represents taxable income, deducted before the final payment, aligning with government income tax regulations for FDs in banks, post offices, or NBFCs.
Section 194A of the Income Tax Act mandates the deduction of tax at the time of interest payment or credit to the account holder, ensuring that the tax is subtracted from the interest amount before it reaches the recipient.
Overall, TDS on fixed deposit interest serves as a mechanism to ensure the timely and efficient collection of income tax by shifting the tax liability to the person or entity responsible for payment, thereby alleviating the account holder from the burden of separately paying tax on their interest income.
How is TDS calculated?
TDS on FD schemes stands at a 10 per cent deduction rate when the total interest earned crosses Rs. 40,000 within a financial year; nevertheless, in the absence of the investor’s PAN, the deduction rate escalates to 20 per cent.
In joint account scenarios, fixed deposit TDS is deducted using the primary account holder’s PAN information, relieving the secondary account holder from any liability associated with TDS deductions on FDs.
The Income Tax Act stipulates an exemption limit of Rs. 40,000 for TDS deduction on FDs for individuals (excluding senior citizens) and a higher limit of Rs. 50,000 for senior citizens.
Individuals with a total taxable income below Rs. 2.5 lakh are eligible for exemption from paying TDS on their FDs.
For senior citizens aged 60 to 79, the exemption limit stands at Rs. 3 lakh, while those aged 80 or above enjoy a higher limit of Rs. 5 lakh according to the Income Tax Act.
Table
According to the Income Tax Act, 1961, FD interest exceeding Rs. 5 lakh or Rs. 10 lakh is subject to additional tax deductions of 10% and 20%, respectively, in addition to the TDS.
Who Deducts TDS on Fixed Deposit?
At the end of each fiscal year, banks and NBFCs automatically deduct TDS on FD from your account where you hold a fixed deposit.
How is the TDS calculated?
Rate of Average Income Tax = Income Tax Payable (computed with slab rates) / Estimated income for the financial year.
How to avail TDS waiver on Fixed Deposit?
Taxpayers can use Forms 15 G or 15 H to eliminate unnecessary TDS deductions or in cases where their income falls below the taxable limit, serving as a means to avoid the deduction. These forms are submitted for this specific purpose.
Form 15 G is designated for individuals below 60 years old with no taxable income, whereas Form 15H is specifically designed for senior citizens aged 60 years or above who have no taxable income.
To eliminate unnecessary TDS deductions or in cases where income falls below the taxable limit, taxpayers can submit Forms 15 G or 15 H for the specific purpose of avoiding these deductions.
Form 15 G applies to individuals below 60 years old having no taxable income, while Form 15H is designated for senior citizens aged 60 years or above with no taxable income.
The Income Tax department clarified that individuals can submit Form 15G/15H if the annual interest doesn’t surpass the exemption limit (Rs. 2,50,000 or Rs. 3,00,000 or Rs. 5,00,000). However, for senior citizens (aged 60 years or above), this condition doesn’t apply. A resident senior citizen can use Form 15H even if the annual interest exceeds the exemption limit, provided their total income tax payable after considering rebate under section 87A amounts to nil.
Also Read: Income Tax Department Clarifies TDS Liability for Online Retailers Under ONDC