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How Fixed Deposits are taxed in India; Here’s all you need to know!

Fixed Deposits are one of the safest forms of investing money to increase savings. Knowledge of taxes on Fixed Deposits can help you plan your decisions to invest better.

For any person thinking of a comfortable future, savings and investments are two major ways to increase wealth – they represent securities as well as hopes for a comfortable and secure tomorrow. Among the various savings options, a good option is the Fixed Deposit or the FD. A Fixed Deposit is a financial instrument, offered  by banks or monetary institutions; investors who sign up for fixed deposit accounts get higher interest rates on a “fixed” amount of money, (higher than regular interest rates in an average savings account) for a defined amount of time till the given maturity date. The defining characteristic of this account is that money cannot be withdrawn from the bank at any given point of time till the maturity date. The fixed deposits interest rates on income amount can be either credited to the investor’s savings bank account, or can be paid as a cheque. In a cumulative Fixed Deposit, the interest income can be reinvested in the Fixed Deposit investment.  If an FD is made in a scheduled bank for a period of more than five years, investors can avail tax deductions of up to Rs.150,000.

The interest earned on an FD is however taxed. Let’s discuss the nitty-gritties of fixed deposit interest rates, how to calculate fixed deposit interests, and the taxation levels levied on them.

Rules about taxes on FDs

Under provisions of the Income Tax Act, 1961, banks may deduct 10% of the income generated as interest on FD amounts, if it exceeds Rs.10,000 in a year. This is known as “Income from other sources.” Banks provide Form 16A to customers as a receipt for Tax Deducted at Source for every quarter.

However, the tax on interest income is applicable at the rate of the tax slab of the investor. If the individual has to pay higher rates of taxes based on the net income, then, after considering the TDS by the bank, the remaining tax on the interest income should be paid by advance tax or self-assessment tax.

  • If a person submits in written or digitally in Form 15G or Form 15H(for individuals above the age of 60 years), that the tax on net income during that year (for which the tax is being calculated), is zero, then the tax deducted at source would be nil even if the amount exceeds Rs. 10,000.
  • Under section 80 TTB of the Act, from the financial year 2018-19, senior citizens can avail tax deductions of up to Rs.50,000, with respect to fixed deposit interest income.
  • If the Permanent Account Number (PAN) details have not been provided to the bank, TDS will be charged at higher rates. For non-residents who have not furnished the PAN, this rate will be 30% along with surcharge and cess.
  • If a person has not submitted form 15G/15H, and the bank has hence charged TDS on interest income, the investor can claim for refund of the deducted taxes by filing income tax returns form.

In a nutshell, Fixed Deposits are one of the safest and most hassle free user friendly investment options for the finance inexperienced client.

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