TDS on Fixed Deposits (FDs) in India
Fixed deposits (FDs) are a popular investment option in India, offering a reliable stream of income with minimal risk. However, the interest earned on FDs is subject to taxation under the Income Tax Act of 1961. This article explains Tax Deducted at Source (TDS) on FD interest, its implications, and how to manage it effectively.
What is TDS on FD?
TDS is a mechanism where a portion of the tax is deducted at the source of income, in this case, the interest earned on your FD. This deduction happens automatically by the financial institution (bank or NBFC) offering the FD. The deducted amount is deposited with the government on your behalf.
Who is Liable to Pay TDS on FD Interest?
- Taxable Interest: TDS applies only to the portion of interest income exceeding a specific limit. Currently, this exemption threshold is INR 40,000 per financial year for individuals under 60 and INR 50,000 for senior citizens (60 and above).
- PAN Status: If you haven't provided your Permanent Account Number (PAN) to the FD provider, TDS will be deducted at a higher rate of 20% irrespective of the interest amount.
TDS Rates on FD Interest
- Resident Indians with PAN: For resident Indians who have provided their PAN details, a lower TDS rate of 7.5% is applicable if their annual FD interest income surpasses the exemption limit for their age group.
- Resident Indians without PAN: If you haven't submitted your PAN, a higher TDS rate of 20% applies.
- Non-Resident Indians (NRIs): NRIs are subject to a TDS rate of 30% on FD interest, along with applicable surcharge and cess.
Exemptions from TDS on FD
You can avoid TDS deduction on FD interest if you fall under any of the following categories:
- Total Income Below Tax Slab: Individuals whose total taxable income falls below the basic exemption limit (currently Rs. 2.5 lakh annually) are exempt from TDS deduction on FD interest.
- Form 15G/15H Submission: You can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to your FD provider. These forms declare that your estimated tax liability for the year is nil. Consequently, no TDS should be deducted on your FD interest.
How to Calculate TDS on FD
Let's illustrate the calculation with an example:
· Imagine Sarah has two FDs worth Rs. 3 lakh each, offering a 10% interest rate for a 4-year term, from a bank and an NBFC. This translates to a total annual interest income of Rs. 60,000 (Rs. 3 lakh x 10% x 1 year).
· Since the interest earned (Rs. 60,000) surpasses the exemption limit for her age group (assuming she's below 60), TDS will be deducted.
· With the current TDS rate of 7.5%, the deducted amount would be Rs. 4,500 (Rs. 60,000 x 7.5%).
Minimizing TDS Burden
Here are some strategies to manage TDS on FD interest:
- Estimate your total income: If your overall income falls below the taxable limit, consider filing Form 15G/15H to prevent unnecessary TDS deduction.
- Plan your FDs: Distribute your FD investments across different institutions to ensure the interest earned from each stays below the exemption threshold.
- Claim TDS refund: If TDS has been deducted even though you're exempt, you can claim a refund while filing your Income Tax Return (ITR).
Conclusion
Understanding TDS on FD interest is crucial for effective tax management. By being aware of the exemption criteria, TDS rates, and claiming deductions when eligible, you can minimize your tax burden and maximize your returns on FD investments. Remember to file your ITR on time to claim any applicable TDS refunds.