Is Fixed Deposit Interest Taxable?

In India, several people across all groups and income categories prefer investing in an FD (fixed deposit) scheme. It is considered the safest and most reliable investment option for a good reason. It gives assured returns at a fixed interest rate and lets you grow your savings faster. 

While investing in FD, and opening an FD account is quite easy, a lot of people have plenty of confusion about TDS on FD interest. If you too are planning to invest in FD or you are an existing FD account holder, you must know about its tax implications. 

Is Fixed Deposit Interest Taxable?

Yes, according to the Indian Income Tax Act, 1961, the interest you get from fixed deposit investment is considered as an income and you must declare it while filing your ITR (Income Tax Returns) under the ‘income from other sources’ head. Therefore, the interest earned on a fixed deposit is fully taxable. 

The FD earnings are included in your gross annual income, and the tax liability is calculated as per the prevalent tax laws.

When are you liable to pay tax on FD interest?

As per the tax laws, and the revisions made to it, since April 2019, if the interest you earn from your investments in FD is more than Rs. 40,000 in a financial year, then you must pay tax on FD interest as TDS (Tax Deducted at Source). If you are wondering how much TDS is deducted on FD, then the TDS rate is at 10%, provided you have a PAN card. And if you don’t have a PAN card, tax on FD interest or the TDS is 20%. The bank or the financial organisation where you hold the FD account will automatically deduct the TDS on FD and credit the balance interest amount to your account. 

What is TDS on FD?

The tax on FD interest is deducted as TDS and the financial organisation will levy the TDS on the interest earned on your FD in a given financial year. To ease the tax burden for the investors, the financial organisation levies the tax every year when the interest is earned and not when you receive it. 

Let us understand this with an example.

Let us assume, Miss. Ananya Tiwari holds a FD account with Mahindra Finance for four years, and her annual interest earning is Rs. 40,000. For tax calculation purposes, the financial organisation will deduct a 10% TDS on the interest Miss. Tiwari earns every year till the FD matures. So, the financial organisation will deduct Rs. 4,000 every year and not Rs. 16,000 at after four years, i.e., when her FD matures. 

You would have to bear the TDS only if your interest earnings are more than Rs. 40,000 in a financial year. The TDS for senior citizens fixed deposit limit is Rs. 50,000. 

As a taxpayer, you must know that the TDS on FD is not the only tax liability you have. It is only a small part of the whole tax obligation you have for the year. The total tax on FD is calculated as per the income slab you fall under for that particular year.

Tax liability on Joint FD

Many people in India hold an FD in the name of their child or spouse to ease their tax burden. However, you must know that, even in such cases, i.e., if you have opened a joint FD account with any of your family members, like spouse or child, who may have no income, the interest earned on it is still taxable.

On the other hand, if you have gifted money to your spouse, it is completely tax-free. So, if you are looking for ways to reduce your tax burden, you can invest the gifted cash. In this case, even though the interest earned will be considered as an income, it will be taxed at a reduced rate.

Tax-saving FDs

Now that you know the interest earned on FD is taxable, and a TDS is applicable at 10%, which is deducted every year, you may be wondering if there is a way to avoid taxes completely on FD. One way to save tax is to invest in a tax-saving fixed deposit scheme. 

This scheme has a lock-in period of 5 years, and just like the regular FD, the interest is paid at a fixed rate, which remains constant throughout the five-year term. Also, with tax-saving FD, you can choose the interest payout term, which can be monthly, quarterly, bi-annually or annually. 

Depending on your tax slab, you can claim a TDS refund (if applicable) while filing your returns. Under Section 80C of the Indian Income Tax Act, you can claim a deduction of up to Rs. 1.5 Lakhs per annum.

Final Word

FD is truly an incredible investment to have in your portfolio. The assured returns aspect of it gives your portfolio some stability, and with financial organisations like Mahindra Finance offering high interest rates on FDs, starting from 8.10%, you can be assured of getting valuable returns on your investments and building a sizeable corpus for your future. 

As a taxpayer and a prudent investor, it is paramount that you stay updated with the latest information with regard to tax rates and tax policies. Also, be aware of various deductions available to you so that you can take advantage of them and reduce your overall annual tax liability by being on the safe side of the law.