The Income Tax Department of India considers your total income in a financial year while calculating your tax obligations. The total income includes the interest amount you earn on your fixed deposits. Nevertheless, your financial institution itself deducts a certain amount as TDS and pays it to the tax department on your behalf.
Let’s discover how financial institutions deduct the tax from fixed deposit income and how you can reduce your tax liability by availing a tax-saving fixed deposit.
Tax Obligations on Fixed Deposits (FD)
The interest you earn on your fixed deposits comes under the tax liabilities. The Income Tax Department of India sees it as your ‘other source’ of earning and clubs it with your total income in a financial year. As a result, your total taxable income for that particular year increases. After this, you will be liable to pay the tax according to the taxation slab you fall under.
Let’s consider that your total interest from a fixed deposit is Rs. 1 Lakh, which makes your net taxable income Rs. 8 Lakhs. In this scenario, you will fall under the tax slab for an income range between Rs. 5 Lakhs to Rs. 10 Lakhs in the assessment year 2022-23. Therefore, you will be liable to pay 20% income tax (for the rate, refer to the list of the income tax slab applicable for Fiscal 2022-23).
In this regard, you also need to know that financial institutions apply Tax Deducted at Source, or TDS, by default on your FD earnings. They will deduct a certain percentage of your interest earnings before sending you the aggregated fund value.
Tax Deducted at Source on Fixed Deposit Earnings
As stated, financial institutions deduct a certain amount of your FD interest by applying TDS. Nevertheless, before deduction, they ensure that your total earnings from fixed deposit cross the threshold value of Rs. 40,000 (till 2009, the threshold value was Rs. 10,000). The financial institution will not deduct any amount if the interest gained is less than the threshold.
Following are a few points that you need to know about TDS on fixed deposit:
- Financial institutions apply a TDS of 10% if the interest accrued in a fixed deposit crosses Rs. 40,000. This threshold amount is Rs. 50,000 for senior citizen customers (over the age of 60 years).
- NRI customers will have to bear a 30% TDS on FD interest along with additional charges.
- If the accrued interest crosses Rs. 5 Lakhs and Rs. 10 Lakhs, financial institutions will deduct an additional 10% and 20% of the earnings towards TDS.
Following is an example of how this TDS on FD works:
Let’s consider that your age is 40 years, and the earned interest on a fixed deposit of Rs. 20 Lakhs is Rs. 1 Lakh. In this condition, your TDS liability on FD earnings will be Rs. 10,000. So, your total pay-out amount from the end of your financial institution will be Rs. 20 Lakhs + Rs. 0.9 Lakhs = Rs. 20.9 Lakhs.
How to Stop TDS on Fixed Deposits
You can also stop this TDS on fixed deposit interest by filing Form 15G or 15H, whichever is applicable to you. Form 15G is meant for individuals below the age group of 60 years, and the latter one is for senior citizens (individuals above or equal to 60 years of age).
Nevertheless, while filling in the 15G/H form, you need to ensure that your total earnings in a financial year do not make you liable to pay income tax. In other words, your expected taxable income in a financial year should be lower than Rs. 2,50,000.
Furthermore, if you forget to submit 15G/H and your financial institution applies TDS on your earnings despite your total annual income being lower than Rs. 2.5 Lakhs, you can claim a refund. For this, you will have to apply for Income Tax Returns (ITRs).
In this regard, you can also avail tax saving fixed deposits if you want to reduce your financial obligation to the government. These are a little different from regular fixed deposits. They generally come with a pre-specified lock-in period of 5 years.
Features and Benefits of Tax-Saving Fixed Deposits
Here are all the features and benefits of this type of fixed deposit:
- It helps you enjoy a fixed interest on your savings. In addition, the return remains unaffected by market fluctuations.
- Section 80C of the Income Tax Act of India lets you reduce your taxable income up to Rs. 1.5 Lakhs in a financial year.
- Some financial institutions let you choose a flexible pay-out option after the end of the tenure. You can choose to get your aggregate fund value in the form of monthly or quarterly pay-outs.
- You must keep your deposited amount till the lock-in period of 5 years.
How to Apply for a Tax-Saving Fixed Deposit?
Here is a step-by-step process that will help you apply for this tax-saving deposit online:
Step 1: Visit the official website of your financial institution
Step 2: Log in to the portal
Step 3: Navigate to the section for deposits
Step 4: Click on ‘Tax-Saver FD’
Step 5: Mention the amount you will keep as a fixed deposit
Step 6: Complete the proceeding by tapping on ‘Invest Now’ or other equivalent options
After this, you will open your tax-saving fixed deposit.
If you are not comfortable with the online application process, you can follow the steps mentioned below to open this type of FD account offline:
Step 1: Go to the nearest physical branch of your financial institution
Step 2: Request an application form for the tax-saving fixed deposit
Step 3: Fill in the application form with the necessary details
Step 4: Submit the duly filled-in application form with the necessary documents and cheque or demand draft stating the amount you will invest
After these steps, you will successfully open your fixed deposit account.
Documents Required to Open a Tax-Saving Fixed Deposit
Here are some of the documents you need to submit to open the fixed deposit account:
- Identity Proof: Voter ID, PAN card, driving licence, passport, Aadhar card, etc.
- Residential Proof: Electricity bill, PAN card, passport, telephone bill etc.
The interest from the fixed deposits is not free from tax obligations. In fact, the financial institution where you open this deposit account deducts TDS from your total earnings from FD. Nevertheless, there are also tax-saving fixed deposits that you can opt for to reduce your tax liabilities.
