How Is Interest Earned On Fixed Deposit Taxed?

How is Interest Income Taxed on Fixed Deposits?

The interest income from Fixed Deposits is also fully taxable. It is classified as an “Income from Other Sources that is added to your total income for the financial year and taxed accordingly depending on your income tax slab. There is no special relief when it comes to FD interest.^[2]

Moreover, banks usually deduct 10% Tax Deducted at Source (TDS) if the interest income exceeds INR 5     0,000 in a financial year (INR 1,0     0,000 for senior citizens).^[5] If TDS is deducted, you are required to report the total FD interest income in your Income Tax Return (ITR) via Form 26AS. If you don't have your PAN connected with the bank, you could be charged a TDS of 20%. If your income is below the taxable limit, you may submit a Form 15G (non-senior citizens) or Form 15H (senior citizens). This process allows you to stay in line with tax laws but still keep your FD earnings unaffected. ^[1][2]

How to Calculate Tax on Interest Income?

If you have earned interest from your Fixed Deposits, here’s a simple breakdown of how to calculate the tax:

1. Step 1: Add up all the interest you’ve earned from your FDs during the financial year.
   
   
2. Step 2: Include the total FD interest in your overall annual income, as “Income from Other Sources.”^[1]
   
   
3. Step 3: Check your income tax slab to know which rate will be applied to your income.
   
   
4. Step 4: Calculate the tax you owe based on the applicable rate for your total income (including FD interest).
   
   
5. Step 5: Look at the TDS deducted by the bank. You can find this information in Form 26AS^[3]
   
   
6. Step 6: If the TDS deducted is less than the actual tax due, you will need to pay the remaining tax when filing your Income Tax Return.^[4]
   
   

This simple method helps you figure out your tax responsibility and how much of your FD interest will be kept after tax deductions.

 

When and How to Pay Tax on Interest Income

You don’t need to pay tax on FD interest as soon as you earn it. Instead, the tax is paid when you file your ITR for the financial year. Although the bank will deduct TDS if your FD interest crosses the set limit, it is important to report all the interest you’ve earned across all your FDs in your ITR—even if there was no TDS deduction.

Once you declare your FD interest, it will be taxed according to your income tax slab. If the TDS deducted is less than what you owe, you could pay the difference on the Income Tax portal before submitting your return.

 

Conclusion

Fixed Deposits are a dependable way to save and grow your money, but understanding the income tax on FD interest is crucial. Since the interest you earn from FDs is fully taxable, being aware of how and when to declare it might help you avoid any extra charges or penalties. It’s always better to stay informed and manage your taxes in advance.

As long as you keep your taxable income under the bracket for your tax regime, track your TDS, and file your return correctly, you will ensure that you have optimized your post-tax return and found no surprises. With a little planning, you can always rearrange your FD investments to make the most of them without worrying about taxes.

FAQs

1. Can we avoid tax on FD interest?

   
   You cannot avoid tax if your total income is taxable. However, if your income is below the taxable limit, you may submit Form 15G or Form 15H to avoid TDS deduction by the bank.^[5]
   
   
   

2. What is the exemption limit for TDS on FD?

   
   TDS is not deducted if the total FD interest in a financial year is below INR 50,000 (INR 1,00,000 for senior citizens)^[2]
   
   
   

3. When is the tax on FD interest deducted?

   
   TDS is deducted by the bank when the interest earned on FDs crosses the upper limit during a financial year, usually at the time of crediting interest.
   
   

4. What is the TDS rate on fixed deposit interest?

   
   The standard TDS rate on FD interest is 10%, provided you have linked your PAN with the bank. Without PAN, the rate may increase to 20%.^[2]
   
   

5. Can I avoid TDS on FD interest?

   
   Yes, if your total income is below the taxable limit, you may submit Form 15G or Form 15H  to avoid TDS, requesting them not to deduct any TDS.^[1]
       

6. Is the TDS deducted on FD interest the only tax you need to pay?

                 
   No, TDS is only a part of your tax liability. You must include FD interest in your total income and pay additional tax, if applicable, when filing your return.
   
   

7. Do I need to show FD interest in my ITR even if TDS is deducted?

   
   Yes, you must report the total FD interest in your ITR. TDS is a partial advance tax payment; you might still owe more, or receive a refund.^[6]
   
   

8. How do I calculate the tax on FD interest?

   
   Add total FD interest to your annual income, determine your tax slab, calculate tax accordingly, deduct any TDS paid, and pay the remaining tax while filing your ITR.
   
   

9. Is interest on tax-saving fixed deposits also taxable?

   
   Yes, even though tax-saving FDs offer Section 80C deductions on investments, the interest earned from them is fully taxable as per your applicable income tax slab.^[2]
   
   

10. What happens if I forget to declare FD interest in my ITR?

    
    If you miss declaring FD interest, you may receive a notice from the Income Tax Department, and fines or additional tax may apply. It’s best to report everything accurately and avoid any stress.