A fixed deposit has remained a lucrative and trustworthy avenue of investment among Indian investors. It is one of the easiest and simplest ways to securely grow your hard-earned savings. Although individuals receive assured returns on fixed deposits, they are subject to taxation. However, banks offer the option of opening a tax saving FD, which can help you claim tax deductions on your FD.
To better understand FD tax deductions below, we have provided in-depth details on how your fixed deposit can be taxed.
How Fixed Deposit Returns Are Taxed
Fixed deposits are not the only taxable, but a broad range of liabilities under which your fixed deposit might be taxed. Hence it is crucial that you have proper information about these liabilities to avoid hassles related to the payments of taxes in the future. Whether you have an SBI fixed deposit or any other bank fixed deposit, your fixed deposit will be subject to taxation as per the Income Tax Act, 1961. Given below is the way in which fixed deposits are taxed.
- The fixed deposit returns will be combined with your yearly income at the time of the annual income tax deduction. The sum of the two amounts, i.e., your yearly income and yearly FD returns will decide under which tax slab your gross earnings fall.
- There are a few exceptions to the fixed deposit tax deductions. If the interest earned on the fixed deposit is not more than Rs. 10,000, the depositor will not be liable to pay taxes against the returns earned. Moreover, if the yearly income of an individual does not exceed Rs. 2.5 lakhs, he does not have to pay any taxes. This means, that your income tax returns will not be liable for taxes either.
When and How Is TDS Charged?
TDS or Tax Deducted at Source is directly charged by the bank where the investor holds the FD account. Unlike ITR filing, where the investor himself files his return, the TDS is deducted by the bank on its own. Given below are some of the rules related to TDS.
- TDS cannot be imposed on your fixed deposit if the annual return is less than Rs. 40,000.
- On providing your PAN details, the bank will charge only 10% as TDS against the returns earned, provided the return is more than Rs. 40,000.
- On not providing your PAN details, the bank is likely to charge 20% TDS against the fixed deposit returns earned by you.
- If the investor’s yearly income does not exceed Rs. 2.5 lakhs, he will not be charged for TDS. However, you must fill up and submit the Form 15H and Form 15G to avoid paying any TDS against your fixed deposit returns.
Although there is no way in which you can evade taxes levied against fixed deposit returns, there is certainly a way to reduce it, by creating a tax-saving fixed deposit. If your annual income is more than Rs. 2.5 lakhs and is liable for taxation, you can create a tax saving FD. Opting for a tax saving FD becomes a viable option for all of those who earn more than Rs. 2.5 lakhs a year as it allows the individual to claim tax deductions. As per Section 80 C of the Income-tax Act, individuals who are liable to pay taxes for their fixed deposit can claim a tax deduction of a maximum of Rs. 1.5 lakhs against the returns earned in a year.
However, before you finalise to opt for a tax-saving FD, you must remember a few key things. You will not be able to opt for partial or premature withdrawal before the lock in the period, i.e., 5 years is over. Although the provision of nomination is available in tax-saving FDs, it can only be opted for in case of death of the investor and not any time before that. The option of taking loans and overdrafts too is not available in this kind of fixed deposit. Hence, before considering this option, you must weigh down all the parameters related to it.