Fixed deposits are the most popular tools of investment. FDs offer a viable source of income in the shifting winds of the economic climate. Though investors can completely exploit the benefits stated under Income Tax Act 80 C through fixed deposits, the interest earned on income is taxable.
Devised below is a compilation of how the income tax on income earned from fixed deposits can be calculated and paid.
What are fixed deposits?
Fixed deposits are deposits made by an investor with a bank or NBFC for a stipulated period. The fixed deposit interest rates for regular FD at banks range from 4.50% to 6.50%, whereas for senior citizens, it ranges from 5% to 7%.
Generally, the fixed deposit interest rates offered by NBFCs are higher than regular banks. Lenders like PNB Housing Finance Ltd offer fixed deposit interest rates up to 8.70%, with senior citizens eligible for a 0.25% higher interest rates than regular deposits.
How is interest income taxed?
The interest income received from fixed deposits is entirely taxable. Before further pondering on the topic of taxability, it is essential to be acquainted with the term Tax Deducted at Source or TDS.
Tax Deducted at Source is a means of collecting income tax in India, as per the Income Tax Act of 1961. Any payment covered under this segment is paid after deducting a prescriptive percentage.
TDS & Fixed deposits:
TDS is deducted on interest income earned on Fixed Deposit (FD) if it falls under the taxable category.
Listed below are the revised rules in Financial Year 2018-2019
- With recent changes in the Income-tax Act, senior citizens are not charged TDS (Tax deducted at source) if the interest earned from FD, savings account, and recurring deposits are not more than Rs. 50,000.
- If interest earned is more than Rs. 40,000, then banks will charge 10% on the entire interest and 20% if the investor has not provided PAN card details.
- As per the Income Tax Act 80 C, investors can claim tax exemption on the principal amount up to Rs. 1.5 lakh in a year.
Tax slab and income tax calculation:
- The interest income earned on fixed deposits should be added to the total income of the taxpayer and verify the slab.
- Correlate it with yearly TDS at the bank’s end
- The IT Department will adjust the TDS, although it was deducted against the taxpayer’s final tax liability.
- Even when no TDS is deducted, it is essential to add the interest income to the total income and pay the tax accordingly.
Tax saving FD
An investor can utilize the tax-saving benefits specified under section 80C of the income tax Act,1961, through tax saving FD.
With a binding lock-in period of 5 years, investors can claim a tax deduction of up to Rs. 1.5 Lakhs.
Fixed deposits, although taxable, are a good source of income. With the right schemes and lenders, an investor can make tax benefits through tax-saving FDs.