A person recently asked me ‘Is Fixed Deposit Interest Taxable?’
I was surprised.
But there are many people like him who aren’t aware of the tax treatment of the interest income from bank FDs and other rules. So they miss out on providing details of the interest income from FD in their tax returns.
But when it comes to FD interest, there should be no doubt.
The interest earned from Fixed Deposit is fully taxable. And this FD interest is taxed at the same rate as the rest of your total income, i.e. as per your tax bracket.
So let’s see the full details and Rules of taxation of fixed deposit interest in India:
How is FD interest income taxed in India?
As mentioned earlier, the interest income generated from Fixed Deposits is fully taxable. It gets added to your total income and gets taxed as per the tax slab applicable to you.
And the interest income from Bank FD should be declared under ‘Income from other sources’ in your income tax filings.
The banks deduct tax at source (TDS) at the time they credit the interest to your account, and not just when the FD matures.
So let’s say you have a FD for 3 years and you have chosen the cumulative option to receive the interest at the end of the tenure of 3 years. But you still need to declare the interest income every year, as your bank will be deducting TDS (if applicable) and depositing it under your PAN. So if you don’t declare the interest income in your tax returns, it will result in a mismatch in your TDS data with income tax department (in 26AS statement) and the return you have filed.
So you need to add the interest income to your total income in your Income Tax Return each financial year (even though, the interest may not be paid out as maturity is still some time away).
TDS on FD Interest Income (Latest Rules)
The banks deduct TDS on the interest earned. Here is how the TDS on Fixed Deposit is calculated:
- If interest income from all FDs in a bank is less than Rs 40,000 in a year, the bank will not deduct any TDS (earlier before 2019, this limit was Rs 10,000). And mind you, this limit is for a bank. So you cant avoid it by depositing in two different branches of the same bank.
- If interest income from all FDs in a bank is more than Rs 40,000 in a year, the bank will deduct any TDS at 10%. If in case the bank doesn’t have your PAN linked to FD, then 20% TDS will be deducted.
- But what if your overall income is less than the taxable limit but your interest income is more than Rs 40,000? This means that ideally, you don’t need to pay any tax on the interest income. But for the bank to know that, you need to submit Form 15G or Form 15H to the Bank at the beginning of each financial year to avoid the unnecessary TDS deduction and need to put in the effort to get subsequent refunds from the IT Department. And yes. You need to file Form 15G or 15H at the start of each financial year as it is valid for only one financial year.
- If the bank is deducting TDS at 10% but you fall under the higher income tax slab rates of 20% or 30%, then you will need to pay the remaining tax over the TDS charged as self-assessment tax. And you must pay it before 31st March i.e. the last day of the financial year.
Bank Fixed Deposits can be a source of good interest income for risk-averse and conservative investors. But even though bank FDs seem risk-free, you should know that only deposits (FD) up to Rs 1 lakh are guaranteed by the Deposit Insurance Guarantee Corporation of India (DIGCI).
Many people look at FD as a source of monthly interest income. If you too wish to know how much interest income you can get from your FD, read the following:
- How much is Monthly Interest on Rs 1 crore Fixed Deposit?
- How much is Monthly Interest on Rs 2 crore Fixed Deposit?
We have discussed how the interest of Fixed Deposits is taxed. Now before leaving, let’s also see how fixed deposits can be used to save taxes.
Tax Savings Fixed Deposits (Tax Saver FD 5 Years)
In regular FDs, you can make a deposit for a period of your choice. But for tax saver FD, you can only open it for 5 years. That is, if you park money in tax saver deposit, you will be unable to withdraw before a minimum period of 5 years.
And how can you save taxes using this 5-year Fixed Deposits?
Money deposited in Tax Saver Fixed Deposits of 5 years is eligible for tax deduction under section 80C of the Income Tax Act 1961. The limit for it is Rs 1.5 lakh. But it is also important to note that the interest earned on the tax saver deposit will still be taxed each year!
That is all there is about taxation of Fixed deposits in India. As you may have realized by now, the FD Interest is taxable as per your tax bracket. And the banks are required to deduct TDS (Tax Deducted at Source) on interest income unless the interest income for the financial year is less than Rs 40,000.
Related Reading – Will FD Rates Increase in Future?
So now you got your answer to ‘Is Fixed Deposit Interest Taxable?’ – And you should also be clear about the latest rules (2023) of taxation of Fixed Deposit Interest in India.