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When and How to Pay Income Tax on Fixed Deposit’s Interest Income?

Sobiya Ameen
24 May, 2024 24 May, 2024
When and How to Pay Income Tax on Fixed Deposit’s Interest Income

Income Tax is that form of Direct Tax imposed by the government on the annual Income either generated by Individuals or business entities. A share is calculated on the gross Income earned in a year by using the tax slab introduced by the Finance Ministry of India, which is then to be paid to the government in the form of an Income Tax Return at the end of each Financial Year. This “gross income” includes various sources of Income such as salaries, rental Income, business, shares, fixed deposits, etc.

On what sources is income tax paid?

As previously stated, the head of Gross Income includes various sources of Income which are as follows:-

  1. Salary: Salary, Allowances, leave encashment, basically all the money you receive while rendering your job as a result of your employment agreement
  2. Capital gains: Income from gain or loss when you sell a capital asset
  3. House Property: Income from house or building; this may be owned and self-occupied or may be rented
  4. Business: Income/loss that arises as a result of carrying on a business or profession
  5. Other Source: This is the residual head – includes your Income from savings bank accounts, fixed deposits, family pension, or gifts received

What are fixed Deposits?

In India, Foxed Deposit is a popular mode of investment for various reasons and, therefore, has become a trendy income source in the market as it offers good returns or Interest. In a Fixed Deposit, an Individual can deposit a sum for a fixed period at a specified rate of Interest. At the end of the period, one receives the deposited sum along with the compound interest generated on the respective sum for the specified tenure. For this reason, they are also known as term deposits.

Interest rates on Fixed Deposits 1 are fixed when you open the deposit, and your return on the deposit will depend on the type of deposit you have chosen and the agreed rate of Interest. One can opt for a monthly, quarterly pay-out of Interest or the reinvestment option, which gives one the benefit of compounding.

Income Tax and Fixed Deposit

Fixed Deposits allow taxpayers to exhaust the potential under Section 80C, which permits a deduction of INR 1.5 lakh from their gross taxable Income. However, apart from capital protection ensured, the taxation umbrella comes into the canvas for the interest returns, which are included in an individual’s Income and are subject to annual taxation. In the further part of this article, we have discussed briefly when and how to pay Income Taxes on Fixed Deposits.

Table depicting the Interest paid by different companies to individuals on Fixed Deposits

Interest paid byThreshold limit
Senior citizen (INR)Other Individual (INR)
Co-operative engaged in business, Co-operative engaged in the banking business, Co-op. Land Development Bank, Primary Agricultural Credit Society, Co-op. Land Mortgage Bank50,00040,000

When is the Tax paid on Fixed Deposits?

Interest generated on Fixed Deposits is entirely subject to taxation. This Interest is recorded by the Bank or institution where the Fixed Deposit has been made. The institution is responsible for deducting the taxes from the generated Interest annually on the deposit made by an Individual, in a form known as Tax Deduction at Source (TDS). The institution deducts TDS while crediting Interest to the Individual’s account. The TDS is only made when the amount of Interest is higher than INR 50,000 (for Senior Citizens) and INR 40,000 (for Individuals other than senior citizens). It is important to note that the deduction is not made at the maturity of the FDs but rather annually till the time the FD is matured.

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When the Tax is NOT paid on Fixed Deposits?

In the following circumstances, the Bank does not deduct TDS on the Interest generated on FDs:-

  1. When an individual’s annual Income is less than INR 3,00,000, the Bank will not deduct any TDS, which means that even if an individual’s interest income is INR 40,000 or higher than INR 40,000. Even then, the annual gross Income will be below INR 3,00,000; considering the minimum taxable amount, zero TDS will be deducted.
  2. The Bank is not allowed to deduct TDS when the tax liability on an individual is zero. In such circumstances, banks do not register TDS deductions if an individual submits Form 15G or 15H to banks while claiming Income from Interest on FDs.

How Tax is calculated?

When the Interest generated on the Fixed Deposits is subject to taxation, the Bank or financial institution makes TDS on the Interest generated. Now, when you receive the amount, it will be the amount after the deduction of the TDS, which is made under the following circumstances:-

The bank/financial institution evaluates gross annual interest income on all the Fixed Deposits one has with them. If this calculated interest income is higher than INR 40,000 (or Rs.50,000 for senior citizens), a 10% TDS deduction will be made. 

How Tax is calculated
  • If an Individual fails to provide the PAN (Permanent Account Number) details to the Bank, 20% TDS can be levied. Therefore, it is recommended to ensure that PAN details have been submitted to the respective Bank.

How the Tax is paid

In case the Bank has not made deductions from your generated interest amount for a year, and your gross Income is higher than INR 3,00,000, then make sure you pay taxes on time by yourself. While paying taxes, take care of the following:-

  • The Tax against the Interest earned must be paid by March 31st of the respective year. Make sure that any outstanding tax payment has been settled.
  • If the total tax amount is INR 10,000 or more (including all the taxes on the interest income), Advance Tax is required to be paid, which means that you must pay it all together in one go at or before the end of the financial year. 

Conclusion

Fixed deposit is one of the mainstream investment strategies for the majority of Indian Citizens, which brings it to the purview of Income Tax. In circumstances when an individual has one or more FDs made in a bank, it is viable to pay income taxes if Interest obtained on FDs is higher than INR 40,000 per annum. However, this cap rises to INR 50,000 if an individual is a senior citizen. This Interest is generally pre-deducted in the form of TDS by the respective banks, but the Bank does not deduct any Tax if the FD is the only source of Income and Annual Interest generated on the same is less than INR 3,00,000.

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FAQs

  1. How do I pay Tax on fixed deposit interest income?

    If your Annual Interest income is higher than INR 40,000 (INR 50,000 for senior citizens), then your Tax will be deducted by the Bank as TDS at 10% of the rate only if the Bank has your PAN Details. If you fail to submit the details of PAN, then the rate for TDS levied will be 20%.

  2. How do I pay Tax on fixed deposit interest?

    If your Annual Interest income is higher than INR 40,000 (INR 50,000 for senior citizens), then your Tax will be deducted by the Bank as TDS at 10% of the rate only if the Bank has your PAN Details. If you fail to submit the details of PAN, then the rate for TDS levied will be 20%.

  3. How much amount of FD is tax-free?

    Interest amount up to INR 40,000 per annum is tax-free. However, this slab raises to INR 50,000 per annum for senior citizens.

  4. How do you avoid income tax on FD interest?

    If you want to pay no tax on your FD Interest amount, then make sure that your Interest generated on FD is up to INR 40,000 per annum. However, this slab raises to INR 50,000 per annum for senior citizens.

  5. Is FD Interest taxable on a receipt or accrual basis?

    Any interest you receive from the deposit will become taxable in the year it accrues. FD Interest is taxable annually rather than at the maturation of the FDs. This Tax is generally paid when the Bank deducts the TDS from the Interest amount at the end of a financial year.

  6. Do we need to pay income tax on FD interest?

    Yes, Interest on FD is subject to taxation under Income Tax. Interest amount up to INR 40,000 per annum is tax-free. However, this slab raises to INR 50,000 per annum for senior citizens.

  7. Do we have to pay income tax on FD interest?

    Yes, Interest on FDs is subject to taxation under Income Tax. Interest amount up to INR 40,000 per annum is tax-free. However, this slab raises to INR 50,000 per annum for senior citizens.

  8. Is FD a tax-free investment?

    FD is a tax-free investment only in circumstances where the interest amount is less than INR 40,000 per annum. However, this slab raises to INR 50,000 per annum for senior citizens. Moreover, if FD is your only source of Income and the gross interest amount is less than INR 3,00,000 per annum, then you are also free from taxation.

  9. Should I pay Tax on Interest paid or Interest accrued?

    Any interest you receive from the deposit will become taxable in the year it accrues. FD Interest is taxable annually rather than at the maturation of the FDs. This Tax is generally paid when the Bank deducts the TDS from the Interest amount at the end of a financial year.

  10. Is Interest paid or accrued taxable?

    Any interest you receive from the deposit will become taxable in the year it accrues. FD Interest is taxable annually rather than at the maturation of the FDs. This Tax is generally paid when the Bank deducts the TDS from the Interest amount at the end of a financial year.

  11. Which Interest is taxable, Interest paid or interest accrual?

    Any interest you receive from the deposit will become taxable in the year it accrues. FD Interest is taxable annually rather than at the maturation of the FDs. This Tax is generally paid when the Bank deducts the TDS from the Interest amount at the end of a financial year.

  12. Is accrued but unpaid Interest taxable?

    Any interest you receive from the deposit will become taxable in the year it accrues. FD Interest is taxable annually rather than at the maturation of the FDs. This Tax is generally paid when the Bank deducts the TDS from the Interest amount at the end of a financial year.

  13. Can we avoid Tax on FD interest?

    If you want to pay no tax on your FD Interest amount, then make sure that your Interest generated on FD is up to INR 40,000 per annum. However, this slab raises to INR 50,000 per annum for senior citizens.

  14. How much amount of FD interest is Tax-free?

    Interest amount up to INR 40,000 per annum is tax-free. However, this slab raises to INR 50,000 per annum for senior citizens.

  15. How can I save Tax through FD?

    If you want to pay no tax on your FD Interest amount, then make sure that your Interest generated on FD is up to INR 40,000 per annum. However, this slab raises to INR 50,000 per annum for senior citizens.

  16. Do I need to file an income tax return when FD is my only Income?

    Generally, the Tax is deducted by the Bank as TDS at 10% of the rate of your Interest generated annually. Therefore, you do not need to file an ITR. However, if your interest amount is less than INR 40,000 per annum or INR 50,000 per annum for senior citizens, then there is no tax obligation. Moreover, if FD is your only source of Income and the gross interest amount is less than INR 3,00,000 per annum, then also you are free from taxation. Additionally, it is important to note that if FD is your only source of Income with a total tax amount of INR 10,000 or more (including all the taxes on the interest income), and for some reason, TDS has been deducted by the Bank, Advance Tax is required to be paid which means that you must pay it all together in one go at or before the end of the financial year. 

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References

  1. https://en.wikipedia.org/wiki/Fixed_deposit

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