Everything You Need to Know about Tax Computation on Fixed Deposits

Fixed deposits are a safe and secure way of earning some extra money while keeping your money safe with a financial institution. You can also choose the fixed deposit option with the post office, as they are a tax-saving FD. Check your options and invest accordingly in fixed deposits.

Like any other source of income, the interest that we earn on our fixed deposits is also subject to income tax computation. With fixed deposits, the tax gets deducted at sources before the amount is credited to your account. Various tax slabs are created by the income tax department as per the income tax computation. Therefore, if the interest amount exceeds the minimum threshold, the tax gets deducted from the amount.

For instance, if the annual income of an individual is Rs 8 lakh, then they will fall in the 15% tax category, as per the income tax law for FY 2020-21. Moreover, if the interest on fixed deposits of the individual is Rs 80,000, then the amount will attract a TDS (Tax Deducted at Source) of Rs 12,200 as per 15% income tax computation and a cess of 0.4%.

The various slabs for the TDS on interest earned from fixed deposits are as follows:

  • The income tax computation on FDs or fixed deposits comes to 10% when the amount of interest earned is greater than Rs 10,000/- for the financial year 2019-20. During the 2019 budget, the income tax computation limit on the interest earned from fixed deposits was raised to Rs 40,000/- for the financial year 2020-21.
  • As per the current income tax law, if your PAN number is not attached to the fixed deposit bank account, then the TDS rates on the deposits is 20%.
  • For Non-Resident Ordinary or NRO fixed deposits, the TDS deduction rate is fixed at 30%. On the other hand, Non-Resident External or NRE and Foreign Currency Non-Resident or FCNR fixed deposits are exempt from income tax computation. The detailed information of TDS deduction done by your bank is available on the Form 26AS.
  • Recurring deposits or time fixed deposits made at the post office are exempt from income tax computation. For senior citizens (above 60 years of age), the amount of interest earned on bank fixed deposits is exempt from income tax computation for up to Rs 50,000/- annually.

Fixed deposit

Now that we know the income tax computation slabs on fixed deposits, let us understand what fixed deposits are.

Fixed deposit or FD is essentially a basic savings scheme provided by the bank, where an individual can keep or deposit a particular amount for a stipulated period and receive interest on it. When the deposit completes the stipulated period, it matures, and the individual can withdraw the principal deposit amount along with the earned interest amount. Fixed deposit is generally considered a safe investment scheme, and fixed deposits up to Rs 1 lakh are assured under DIGCI (Deposit Insurance Guarantee Corporation of India).

Ways to save or reduce tax on bank fixed deposits

Let us check out some tax-saving FD options or tax-saving fixed deposit options to save income tax.

  • If the total annual income, including the interest earned on fixed deposits, is below the minimum taxable income limit of Rs 2.5 lakhs, then you should submit Form 15G or Form 15H to your bank to seek exemption from the TDS deduction on the interest earned on fixed deposits. Once you submit the form, the bank will stop deducting TDS on the interest for that particular financial year.
  • If you are looking for a tax-saving fixed deposit scheme, then you have the option to open an FD account with the post office. Fixed deposits done at the post office are exempt from income tax computations.
  • You can choose to open a fixed deposit account in the names of your family members, such as spouse, parents, and so forth. In such cases, the income tax computation on the interest earned from fixed deposits is done as per the total annual income of the individual who owns the account.

Plus, the total annual income and the resultant tax slab will be decided as per the individual. So, you can enjoy a considerable FD tax benefit if you open a fixed deposit in your spouse’s name, if she is a housewife or in your children’s name if they are a student. Since their total annual income will be less than the minimum taxable income limit, they will be exempt from any income tax computation and TDS deductions.

  • You can open different fixed deposit accounts with different banks. This can help in reducing your taxes. For instance, if you wish to deposit Rs 3 lakhs as fixed deposit and let’s say, the rate of interest is 10%, then your annual interest income is Rs 30,000, which is higher than the interest income limit of Rs 10,000, as per FY 2019-20. As a result, the bank will cut the TDS on the interest earned.

Now, if you equally divide your fixed deposit amount between four different banks, the total interest that you will earn is approximately Rs 7500 in each of the accounts. This amount is less than the minimum limit of Rs 10,000. Thus, no TDs will apply to your interest amount.

  • Plan your investment in a better way. For instance, if you invest in fixed deposits nearer to the financial year-end or in the middle of the year, the TDS will get distributed between two years. As a result, the calculation of interest for one particular year will fall below the minimum limit. Thus, the interest earned will not face TDS deductions.

Important points to remember about tax deductions

  • If your bank has already deducted the TDS, and your total annual income is below the taxable income limit, then you should file for income tax returns to claim TDS refund on the tax deductions.
  • If your total annual income falls in the higher tax slabs of 20% or 30%, then you will have to pay extra income tax, over and above the TDS deducted on interest, under the bucket of self-assessment tax.

If you need further help with TDS on salary calculator and taxable income calculator, then connect with our experts to know more.

Fixed deposits are a safe and secure way of earning some extra money while keeping your money safe with the bank or financial institution. You can also choose the fixed deposit option with the post office, as they are a tax-saving FD. Check your options and invest accordingly in fixed deposits.

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