Income Tax on FD Interest Income- Everything you should know about
Fixed Deposits are one of the safest investment options for the middle- and lower-class sections of society. But do you know it is compulsory to disclose FDR interest in the income tax return e filing? FDR interest is taxable income as per the Income Tax Act. Even the banks are obliged to deduct TDS on the FDR interest they pay to the depositors. If you have made deposits with banks, this blog is for you.
What is a Fixed Deposit?
A Fixed Deposit represents a deposit made in a bank for a fixed tenure having a definite maturity date. Broadly known as ‘FD’ or ‘FDR’, you can open an FD in a bank or a financial institution. On maturity, you are eligible to withdraw the principal amount along with cumulative interest. Alternatively, you can also renew the FD on its maturity for a further period with prevailing interest rates.
FD is considered one of the safest investment options with a higher interest rate as compared to saving bank interest. Investment in FD is secured up to Rs. 5 Lakhs by the DIGCI (Deposit Insurance Guarantee Corporation of India).
How is interest income from fixed deposits taxable?
- Interest earned on fixed deposits is taxable as per the Income Tax Act, 1961.
- If you have FD in one or more bank accounts, you should aggregate FD interest from all the banks and declare it as a taxable income under the head “Income from Other Sources” in the income tax return.
- For calculation of FD interest, you may ask your bank to issue an “Interest Certificate”. Otherwise, you may also refer to Annual Information Interest (AIS) for getting the figure of FD interest.
- The tax rate on FD interest depends on the tax slab as applicable to the assessee. For example, if your total income falls in the 20% tax bracket, FD interest will be liable for tax @ 20% plus cess.
Is TDS applicable to FDR interest?
- Yes, the banks and financial institutions are liable to deduct TDS at the rate of 10% on the FDR interest paid by them to the depositors.
- However, the threshold limit of tax deduction is Rs. 40,000. Therefore, the banks & financial institutions will deduct tax at source on FDR interest only if the FDR interest paid by them to the depositors is more than Rs. 40,000.
- Please don’t forget to submit your PAN card to the bank, as the bank or financial institution shall deduct TDS @ 20% in absence of the PAN of the depositor.
Can I get the refund of TDS on FDR interest?
- The amount of tax deducted by the banks or financial institutions can be verified in Form 26AS.
- The tax so deducted can be adjusted by the taxpayer against the tax liability at the time of filing an income tax return or could be claimed as a ‘Refund’ in the ITR e -filing.
When is TDS not deducted on FDR interest?
In the following situations, the banks are not liable to deduct TDS on FDR interest:
- In the case of a senior citizen where the total interest amount on FD/RD does not exceed Rs. 50,000 for the financial year
- In case of a Fixed Deposit account in a Post Office
- If you have an NRE (Non-Resident External) or FCDR (Foreign Currency Non-Resident) FD.
Is deduction under section 80C allowed for investment in FDR?
Not all FDR investments are eligible for tax benefits under section 80C of the IT Act. To get the benefits under section 80C up to Rs. 1,50,000, you can open a 5 years Tax saver FDR with any scheduled commercial bank. Tax saver FDR has a lock-in period of 5 years.
How to save income tax on FDR?
- You can open a fixed deposit in a Post Office rather than a bank to save TDS on the FDR interest as the Post-offices don’t deduct TDS on interest. But please keep in mind that the FDR interest is still taxable even if no TDS is deducted on it.
- 15G/15H declaration is a good option where your income is below Rs. 2,50,000. You can give a 15G/15H declaration to your bank at the beginning of the year and the bank on receipt of the declaration shall not deduct TDS on FDR interest paid by it.
- You can smartly plan for tax savings by splitting the investment portfolio in the name of your other family members. You may gift the amount to your son, or daughter except your spouse and make FD in their name. Even you can make FD in the name of your HUF which is considered a separate tax entity in the eyes of the IT Department. This way the FD income will get split in the name of more than one person.
How to reply to the income mismatch notice on FDR interest?
Do you know that the Annual Information Statement published by the IT Department provides the detail of FDR interest earned by you? But some taxpayers are not aware of this fact. Thus, many taxpayers get messages and emails from the IT department regarding a mismatch in the interest income as per the data available with the department and the ITR filed.
So, a question comes to our mind "how to respond to the email or notice of the IT Department regarding income mismatch". Please keep in mind that you cannot escape the tax liability. Therefore, if you have got such notice, you should file a revised return or updated return on the e-filing portal of the Income Tax.
While filing the revised return or updated return, add the interest income not disclosed earlier and pay tax and interest due thereon. If any TDS remained unclaimed earlier, you may also claim such unclaimed TDS in the revised/ updated return.
Which ITR form should be used for reporting FDR interest?
There is no specific form for declaring FDR interest income. Generally, in the case of salaried taxpayers, the Form ITR-1 or ITR-2 is used for filing the return. If you are a salaried person, you should declare FDR interest in ITR-1/2. In other cases, the appropriate ITR form applicable to the assessee shall be used to declare FDR interest income.
Important Points:
- In the case of senior citizens, interest income from saving bank/ fixed deposits is exempted up to Rs. 50,000 as per section 80TTB.
- In the case of interest from FDR for the Non-Resident Ordinary (NRO) account, the banks shall deduct TDS at the rate of 30%.
- No TDS is applicable in the case of interest on FD/RD made with a post office.
For any ITR filing assistance, connect at 09660930417.
