Income Tax on Fixed Deposit Interest

Fixed Deposits (FDs) are one of the most popular investment options for individuals looking for stable returns and financial security. They offer guaranteed returns with minimal risk, making them ideal for risk-averse investors. However, many people overlook the tax implications of fixed deposits, which can impact overall earnings. Understanding how interest on fixed deposits is taxed can help investors plan better and maximize savings.

In this guide, we will cover everything about the taxation of fixed deposits, applicable tax slabs, deductions, and tips to save tax on FD interest.

How is Fixed Deposit Interest Taxed?

Interest earned on Fixed Deposits is considered "Income from Other Sources" and is fully taxable as per your income tax slab. The tax is calculated based on your total income, including salary, business income, and other earnings.

TDS (Tax Deducted at Source) on Fixed Deposit Interest

Banks and financial institutions deduct TDS (Tax Deducted at Source) on FD interest if it exceeds a certain threshold.

TDS Deduction Criteria:

For Regular Taxpayers: If the interest earned in a financial year exceeds ₹40,000, the bank deducts TDS at 10%.

For Senior Citizens: The TDS deduction limit is ₹50,000.

If PAN is not provided: TDS is deducted at 20% instead of 10%.

How to Avoid TDS on FD Interest?

Submit Form 15G (for regular taxpayers): If your total income is below the taxable limit, you can submit Form 15G to prevent TDS deduction.

Submit Form 15H (for senior citizens): Senior citizens can submit Form 15H if their total taxable income is within the exemption limit.

Tax Benefits & Exemptions on Fixed Deposits

While FD interest is taxable, there are some exemptions and deductions available:

Section 80C: Tax Saving FD

Tax-saving FDs offer deductions up to ₹1.5 lakh under Section 80C.

The FD has a lock-in period of 5 years.

The interest earned is taxable, but the principal amount invested is deductible.

Section 80TTB: Tax Exemption for Senior Citizens

Senior citizens (aged 60+) can claim a deduction of up to ₹50,000 on FD interest under Section 80TTB.

This exemption applies to interest earned from banks, post offices, and cooperative banks.

How to Report FD Interest in Income Tax Return (ITR)?

Here’s how you can accurately report your FD interest while filing your Income Tax Return (ITR) to ensure compliance and avoid penalties.

Calculate Total Interest Earned: Collect interest certificates from banks.

Report Under ‘Income from Other Sources’: Declare total interest income in the ITR.

Check TDS Deducted: Verify if the bank has already deducted TDS and claim a refund if applicable.

Claim Deductions (If Eligible): Senior citizens can claim 80TTB benefits, and others can use 80C for tax-saving FDs.

Pay Additional Tax (If Required): If TDS deducted is less than the actual tax liability, pay the balance amount.

Tips to Save Tax on Fixed Deposit Interest

Opt for Tax-Saving FD: Invest in 5-year tax-saving FDs to get deductions under Section 80C.

Use the Senior Citizen Exemption (80TTB): If you are a senior citizen, claim the ₹50,000 deduction.

Submit Form 15G/15H: If your income is below the taxable limit, submit the required forms to avoid TDS deductions.

Split FDs Across Family Members: Spread investments across family members to keep interest earnings below the TDS threshold.

Invest in Post Office FDs: Some government-backed deposit schemes offer tax benefits and may have lower tax implications.

Conclusion

Fixed Deposits remain a secure and reliable investment option, but understanding their tax implications is essential. While FD interest is taxable, strategic planning using deductions like 80C and 80TTB can help you optimize your tax liability. Ensure you report your interest income accurately in your Income Tax Return (ITR) and explore ways to legally save tax on FD interest.

For hassle-free tax filing and expert guidance, consult a tax professional or use an online tax filing service to ensure compliance and maximize savings.