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Income Tax on Fixed Deposit’s Interest Income

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Most risk-averse people prefer to invest in fixed deposits, recurring deposits, or the Public Provident Fund (PPF). This is because these popular investment options generate interest income, largely unaffected by market conditions. Interest income is treated as an extra source of income and, like any other type of income, is taxed according to the country’s Income Tax rules. This means that if the income from your investment exceeds the government’s established threshold, it will be taxed. However, the Income-tax Act of 1961 provides many tax deductions that you might use to reduce your tax liability. This post will explain when and how to pay income tax on the interest income from FD.

When should interest income be taxed?
If you have a tax due as a result of including interest income in your total income, you must pay it by March 31st of the following year. This is how you pay any taxes that are owed to you. However, you must pay Advance Tax if the tax payable after including your interest income in your total income is higher than Rs.10,000. As a result, installments’ quarterly advance tax payment rules must be compiled.

How do you compute the tax on the interest income from FDs?
Each year, in your Income Tax Return, add interest income to your total income (even though it may not be paid out). Interest income must be reported on the ITR under the heading ‘ income from other sources.’ Find out which tax bracket you belong to. The TDS (which has already been deducted) will be adjusted against your final tax liability by the Income Tax Department. If your bank does not deduct TDS from your interest income, you must add the total interest income from your fixed deposits in a given fiscal year to your total income and pay tax on it. It is not advisable to record interest income until your FD matures and receives interest. This is because accrued interest may force you to fall into a higher tax bracket, causing you to pay more tax.You can examine the TDS details deducted on any of your income by viewing your Form 26AS.

TDS related to interest income from FDs

  • Basics of interest income from FDs
    When you receive certain payments, the person making the payment must deduct tax before making the payment. This tax deducted at the source is known as TDS, and it is paid to the Central Government. You will receive a tax-free credit for the amount you paid. After that, while filing your income tax return, you must add the gross amount to your income. In contrast, TDS credit is given from the entire tax liability, or a TDS refund is given if the tax liability is zero. For example, if you earn Rs.100 in FD interest, the bank will deduct 10% TDS, or Rs.10, and deposit it with the government. Therefore, you must record the total interest generated of Rs.100 in your ITR and claim the TDS deducted by the bank of Rs.10 as a TDS refund or tax credit from the outstanding liability, as the case may be when reporting interest income in your ITR.
  • When does the bank be unable to deduct TDS:
    The bank cannot take any TDS if your total interest income from all bank FDs is less than Rs 40,000 in a year. A senior citizen aged 60 and above has a limit of Rs 50,000. TDS on interest income was restricted to Rs. 10,000 before Budget 2019.
  • When does the bank deduct TDS at a rate of 10%?
    The bank calculates your annual interest income based on all of your FDs. If your interest income exceeds Rs 40,000, TDS will be deducted at 10%. (Rs 50,000 in the case of senior citizens). TDS on interest income was limited to Rs. 10,000 before Budget 2019.
  • When does the bank deduct TDS at a rate of 20%?
    If you do not disclose your PAN number to the bank, they will deduct 20% TDS from your account. As a result, double-check that the bank has your correct PAN number.
  • When your total earnings are less than Rs. 2.5 lakh
    No TDS is deducted when your total income falls below the taxable threshold. Some investors may earn more than Rs 40,000 in interest income each year, but their total income (including interest income) falls below the exempt income threshold (Rs 2.5 lakh for FY 2021-22).

The bank is unable to deduct TDS when the individual owes no tax. For example, if you file Form 15G or 15H to claim interest income without TDS, the bank will not deduct TDS. Therefore, it’s important to keep in mind that the TDS is deducted when the interest is credited, not when the FD matures. The bank will deduct TDS if you have a three-year fixed deposit.

At AJSH, we assist our clients with various income tax compliances, including income tax assessments, ITR filings, tax advisory, TDS matters other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about Income Tax on Fixed Deposit’s Interest Income, kindly contact us.


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