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Fixed deposit and Income Tax payment

What is the relationship between Fixed deposit and Income Tax payment ? Ask any investor about the investment and the first concern they will raise is income tax. Taxation affects the investment decision up to the extent that many investors end up spending more to pay less tax. Banks are increasing the interest payments for fixed deposit accounts to make it demanded but if you want to know, in depth, about the tax treatment these deposits have for interest payment, keep on reading further.

Income tax department has a provision called TDS (Tax Deducted at Source). These deductions take place automatically for the FD interest income by the bank. But don’t get confused. It is not the only tax liability your interest payments attract. Many people fail to include interest from the fixed deposits while calculating the payable tax. The TDS deducted by the bank is only a partial tax liability. The rest of the tax deduction amount is calculated by including the interest income in ‘income from other sources’. The tax slot, your income lies in, is then applied to the interest income and then gets reduced by the TDS already paid.

How much is the TDS deducted?

Banks deduct TDS from the interest income if it is greater than Rs. 10,000. The TDS deducted is 10% if bank has the PAN data in its records. If bank doesn’t have PAN record of the account holder, TDS is deducted at 20% rate.

Whatif I earn less than the minimum taxable income?

If your income is below the minimum tax slot (10%), the TDS deduction from the FD interest income can be reclaimed during the tax filings. Another method receive those amounts is by filling up “Form 15G” declaring that your yearly income is less than the minimum tax slot and thus bank should not deduct the TDS.

Benefits for the senior citizen

Income tax department has provided a concession to their senior citizen. The TDS on the accounts hold by senior citizen is zero. Such applicants have to submit “Form 15G” to the bank.

Let us understand whole process with the help of an example.

Mr. Dinesh, belongs to 30% tax bracket. He holds a FD of Rs 10 Lacks which gives interest of 9%. So his yearly interest income is Rs 90,000.

On the basis of his net tax liabilities, Mr Dinesh has to pay 30% of Rs 90,000 to the tax which is Rs 27,000.

The bank deducts TDS of 10%, i.e. Rs 9,000.

Thus, net payable tax is 27,000-9,000= Rs 18,000.

When these interest payments get deducted?

TDS on interest are paid as and when interest is accrued. This gets reflected in Form 26AS. Form 26AS is a credit statement which shows the paid income tax. For smooth functioning, one should include interest payments in tax calculation yearly as opposed to calculate them when FD matures. This also prevents from bumping into higher tax slot while declaring income as lump sum.

2 COMMENTS

rkadakia November 13, 2015 at 9:51 am

This is what i was looking for! A good explanation with a good example. I never knew that TDS is a part of bigger tax pie. Good you helped me understand the entire process. I guess Form 15G is also applicable for people whose income lies below the tax bracket. So now that the concepts are clear, we should be judicious in choosing the investment options which are beneficial in the long run. Tax saving fixed deposits should be wiser if we are planning for long term investments
Vandana Agarwal October 10, 2016 at 10:12 am

A very technical term. TDS or the tax deduction at the source is a complicated term for a layman. But how much and when it should be deducted, the individual should have a proper knowledge about it. Saving tax is a major concern for any investor for this he has to know what proper methods like submitting his pan card detail to the bank is a must.