Investing comes with a variety of options, each suited to different financial goals, risk levels, and time frames. One of the safest and most popular investment choices is a Fixed Deposit (FD). Currently, FDs offer attractive interest rates, making them a preferred option for risk-averse investors. However, it’s essential to understand the impact of Tax Deducted at Source (TDS) on the interest earned from FDs.
Let’s break down what an FD is and how TDS is applied to it.
What is a Fixed Deposit (FD)?
A fixed deposit is a savings scheme where an individual deposits a fixed amount with a bank or financial institution for a predetermined period. In return, the depositor earns interest at a fixed rate, which is generally higher than the interest offered by savings accounts.
FD holders can choose to receive interest payouts on a monthly, quarterly, half-yearly, or annual basis, depending on their financial needs. This makes FDs a reliable option for those looking for stable and predictable returns.
What is Tax Deducted at Source (TDS)?
Tax Deducted at Source (TDS) is a tax collection mechanism where the payer (e.g., banks in the case of FD interest) deducts tax at the time of payment and deposits it with the government. This ensures that taxes are collected at the source of income itself, reducing the chances of tax evasion.
TDS applies to various income sources, including salaries, rent, and interest earned on fixed deposits. The deducted amount is adjusted against the total tax liability of the individual when they file their income tax return.
How is TDS applied to fixed deposits?
TDS on fixed deposits is deducted by banks based on the interest earned and is deposited with the Income Tax Department. Here’s how it works:
- TDS is deducted only if the interest earned in a financial year exceeds ₹40,000 (for regular taxpayers).
- For senior citizens (aged 60 and above), the exemption limit is ₹50,000 per year.
- If the total interest earned exceeds these limits, the bank deducts TDS at a rate of 10%.
- If the investor does not provide a PAN card, the TDS rate increases to 20%.
- If the investor’s total annual income is below ₹2.5 lakh, they can submit Form 15G (for regular taxpayers) or Form 15H (for senior citizens) to the bank to claim exemption from TDS.
How is TDS on FD interest calculated?
TDS on FD interest is calculated based on the following factors:
- Total interest earned on all FDs in a financial year.
- Applicable tax slab of the investor.
- Submission of Form 15G or 15H, if applicable.
For example:
- If you earn ₹35,000 as FD interest in a year, no TDS is deducted as it is below the ₹40,000 threshold.
- If you earn ₹45,000 as FD interest, 10% TDS is deducted on ₹45,000, meaning ₹4,500 will be deducted, and the remaining interest will be credited to your account.
- If you don’t have a PAN card, 20% TDS (₹9,000) will be deducted.
Final Thoughts
Understanding TDS on fixed deposits is crucial to managing your investments effectively. While FDs offer safe and steady returns, it’s essential to plan your taxes wisely. If you fall within the tax exemption bracket, don’t forget to submit Form 15G or 15H to avoid unnecessary TDS deductions.
Would you like assistance in choosing the best FD option for your financial goals? Let us know in the comments!
