Fixed deposit are one of the most popular investment options in India because of their low-risk nature and guaranteed returns. They provide you with a safe and secure way to grow your savings.
Considering that fixed deposits can help you generate returns based on the applicable interest rates, they are not free from taxation.
Thus, it is essential to gain a comprehensive understanding of the taxation on fixed deposits to ensure that you can make informed investment decisions. Koshex is here to discuss the basics of fixed deposits and how the interest earned on fixed deposits is taxed in India.
What is a Fixed Deposit?
A fixed deposit is a financial instrument offered by banks and financial institutions where you can deposit a lump sum amount for a specific period at a predetermined interest rate. Accordingly, fixed deposit holders have to pay tax on the fixed deposit interest earned.
The interest rates offered on fixed deposits vary depending on the duration of the fixed deposit and the policies of the respective banks. Typically, longer-term fixed deposits tend to offer higher interest rates.
This is because banks hold your funds for a longer duration on which they can earn interest. The interest earned on fixed deposits can be paid out at regular intervals or compounded and paid at maturity. However, this depends upon the policy of the bank or financial institution.
How Is Fixed Deposit Interest Income Taxed in India?
Many fixed deposit holders may wonder, ‘Do we have to pay tax on fixed deposit interest?’ In India, the interest income earned from fixed deposits is considered a part of the depositor’s total income and is subject to taxation under the Income Tax Act, 1961. The interest income is classified under the head ‘Income From Other Sources’. The tax on fixed deposit interest income is calculated based on the income tax slab rate applicable to the depositor.
It is important to note that the tax liability on fixed deposit interest income differs depending on whether the fixed deposit is cumulative or non-cumulative.
Calculating the maturity amount of a Fixed deposit can be a complicated and time-consuming process. An online Fixed Deposit calculator enables one to figure it out without breaking a sweat.
1) Taxation of Cumulative Fixed Deposits
In the case of cumulative fixed deposits, the interest earned is reinvested and added to the principal amount. The interest income is not paid out periodically. Instead, it gets accumulated and is paid out at the time of maturity along with the principal value invested. The entire interest earned on the cumulative fixed deposit is taxable in the year of maturity. Here’s a simple example to better understand this concept:
Suppose you have a cumulative fixed deposit of Rs. 1 lakh with an interest rate of 8% per annum for three years. The interest earned on this FD would be Rs. 24,000 (based on the simple interest method). However, this interest income will be added to your total income in the year of maturity. Thus, you will be liable to pay tax on it as per the income tax slab rate applicable to you.
2) Taxation of Non-Cumulative Fixed Deposits:
Non-cumulative fixed deposits provide the depositors with the option to receive interest income at regular intervals. This may be set as monthly, quarterly, half-yearly or annually. The tax on non-cumulative fixed deposit interest income is applicable in the year in which the interest is received by the depositor. Here’s a simple example of the same:
Suppose you have a non-cumulative fixed deposit of Rs. 1 lakh with an interest rate of 8% per annum. If you choose to receive interest income quarterly, then you will receive interest of Rs. 2000 each quarter. The interest earned of Rs. 8000 will be added to your total income in the respective financial year and you will be taxed accordingly.
TDS on Fixed Deposits
Tax Deducted at Source (TDS) is a mechanism employed by the Indian government to collect tax at the source of income. This implies that the tax will get deducted and paid to the Indian Government as soon as the income is earned. TDS is applied on fixed deposits as well. Thus, it is essential to understand the TDS rules to ensure compliance.
In the case of fixed deposits, if the total interest income earned from all fixed deposits with a particular bank exceeds Rs. 40,000 in a financial year, the bank is obligated to deduct TDS at the prevailing rate. In case the depositor is a senior citizen, then the limit shall be Rs. 50,000 during the financial year. The TDS rate is typically 10% if the Permanent Account Number (PAN) is provided. However, if you fail to provide your PAN, then the TDS rate applicable shall be 20%.
Also, if your total income does not exceed the taxable threshold limit of Rs. 2.5 lakhs during the financial year, then you can submit Form 15G or Form 15H (for senior citizens) to the bank. This is a declaration that your income is below the taxable limit and will exempt you from a TDS deduction on your interest income from fixed deposits.
Conclusion
Fixed deposits offer a secure investment avenue with fixed returns. However, it is crucial to understand the taxation rules surrounding fixed deposit interest income in India. The interest income earned on fixed deposits is considered a part of your total income and is subject to taxation at the applicable income tax slab rate. The tax liability varies according to cumulative and non-cumulative fixed deposits. However, it is important to select the right fixed deposits to earn inflation-beating returns.
Koshex has been pioneering in providing fixed deposit schemes with assured and higher returns. It allows you to select from a wide pool of fixed deposits offered by different financial institutions. Apart from this, you also get the loan and nomination facility whereby you can avail of a loan against your fixed deposits in case any emergency arises. Sign up with Koshex and start your investment journey today.
FAQs
Q: Can I avail of tax benefits on fixed deposits in India?
A: Yes. Fixed deposits offer tax benefits as per the current provisions of the Income Tax Act, 1961. In case you put your money in any five-year term deposit, you can claim the amount deposited as a deduction from your income under Section 80C. They function as tax-saving FDs, and the maximum amount of deduction that you can avail of is Rs. 1.5 lakhs during a given financial year.
Q: Can fixed deposits provide inflation-beating returns?
A: Yes. Numerous fixed deposit schemes are offered by different financial institutions. If you select the right institution, then you can earn good returns over the deposits made with that financial institution. These returns can beat inflation considering that the current inflation rate is around 6%-7% per annum.
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