TDS on Fixed Deposits: With the financial year drawing to a close, a lot of investors will be rushing to make last-minute investments. Fixed deposits (FD) are one of the most popular investment tools with public and private sector banks and NBFCs offering attractive interest rates. Though FDs are considered as a low-risk, high-return investment tool, one should note that tax is levied on the final interest amount. It is to be noted that the tax is levied only on the interest amount not on the principal amount.
The interest earned from FDs is a taxable income and is subject to tax deductions. This deduction of tax is known as Tax Deducted at Source (TDS). It is deducted before making the final payment. In the case of fixed deposits, whether it is with a bank, post office, or NBFC, TDS is deducted in accordance with the income tax regulations set by the government.
Section 194A of the Income Tax Act states that tax should be deducted at the time of payment or credit of interest to the account holder, whichever occurs earlier. This means that the tax is deducted from the interest amount before it is credited or paid out to the account holder.
This ensures that the tax liability is fulfilled by the person or entity responsible for making the payment, thus relieving the account holder from the burden of paying tax separately on their interest income. Overall, TDS on fixed deposit interest serves as a mechanism to ensure the collection of income tax in a timely and efficient manner.
How is TDS calculated?
TDS on FD schemes is currently deducted at a rate of 10 per cent. If the total interest earned on FDs for a financial year exceeds Rs. 40,000. However, if the investor’s PAN is not available, TDS is deducted at the rate of 20 per cent.
For joint account holders, fixed deposit TDS is deducted against the primary account holder’s PAN information. The secondary account holder is not liable for any deductions relating to TDS on FD.
As per the Income Tax Act, the exemption limit for TDS deduction on FD is Rs 40,000 for individuals (excluding senior citizens) and Rs. 50,000 for senior citizens.
Also, individuals with a total taxable income of less than Rs. 2.5 lakh are eligible for exemption from paying TDS on their FDs.
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The exemption limits for senior age groups are Rs 3 lakh for senior citizens aged 60 to 79, and Rs 5 lakh for those aged 80 or above.
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FD interest gained over Rs 5 lakh or 10 lakh is eligible for extra tax deductions of 10% and 20% respectively in addition to TDS as per the Income Tax Act, 1961.
Who Deducts TDS on Fixed Deposit?
Banks and NBFCs where you have a fixed deposit account automatically deduct TDS on FD at the end of each fiscal year.
How is the TDS calculated?
Rate of Average Income Tax = Income Tax Payable (computed with slab rates) / Estimated income for the financial year.
How to avail TDS waiver on Fixed Deposit?
In situations where TDS is levied unnecessarily, or, the income is below the taxable limit, a taxpayer can utilise Form 15 G or 15 H to get rid of the deduction. Forms 15 G and 15 H are submitted for this purpose.
Form 15 G is for individuals below the age of 60 years with no taxable income, while Form 15H is for senior citizens (aged 60 years or more) with no taxable income.
In situations where TDS is levied unnecessarily, or, the income is below the taxable limit, a taxpayer can utilise Form 15 G or 15 H to get rid of the deduction. Forms 15 G and 15 H are submitted for this purpose.
Form 15 G is for individuals below the age of 60 years with no taxable income, while Form 15H is for senior citizens (aged 60 years or more) with no taxable income.
“Declaration in Form No. 15G/15H can be made, if the annual interest does not exceed the exemption limit (i.e. Rs.2,50,000 or Rs. 3,00,000 or Rs. 5,00,000, as the case may be).
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However, this condition is not applicable in case of a senior citizen (i.e. resident individual of at least 60 years of age) i.e. a resident senior citizen can furnish a declaration in form 15H even if annual interest likely to be paid to him exceeds the exemption limit of Rs. 2,50,000 or Rs. 5,00,000, as the case may be, provided the tax payable on his total income after considering the rebate under section 87A is nil,” said the I-T department.
